One of the most rewarding parts about income investing is collecting a dividend. Unfortunately, for new investors, that can also be the most difficult. That’s especially true when investing real money for the first time to get an income that looks like a rounding error. That’s hardly the dividend snowball that investors expect!
But that’s precisely how that dividend snowball starts rolling. That first payout from a long-term position in a business that has a history of growing its dividends gives investors a great foundation to build on.
That is, provided investors choose the right stock to build that foundation with through regular contributions and reinvestments.
Enter Canadian National Railway (TSX: CNR) as the stock your portfolio needs.
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How a dividend snowball begins with one share
A dividend snowball is straightforward. An investor buys shares, collects the dividends, and uses that income to purchase more shares. Those additional shares then produce dividends of their own.
It’s like a snowball rolling down the hill. It collects more snow, gets larger, and starts rolling faster.
At first, the effect can feel almost invisible. As of the time of writing, Canadian National pays a quarterly dividend of $0.915 per share, so one share will generate less than $4 in annual dividend income, at least this year.
Furthermore, that payout won’t be enough to buy a full new share on its own. It needs some help in the form of additional contributions.
Eventually, the share count begins to do more of the heavy lifting.
Why Canadian National fits that long-term dividend strategy
Canadian National isn’t a stock that investors buy for the yield. As of the time of writing, the railway pays just 2.13%. That’s lower than most other established dividend stocks.
Where Canadian National does become appealing is when its business comes into play.
The company operates one of the larger rail networks in North America. That network stretches from coast to coast and down through the U.S. Midwest to the Gulf of Mexico.
This allows Canadian National to connect the warehouses, factories, and ports along its network to three coastlines on the continent.
Goods that Canadian National hauls can be anything from grain and forest products to automotive parts, energy products, and intermodal shipments. The sheer importance and volume of goods transported makes the railway an important part of the entire North American economy.
In total, over $250 billion worth of goods are transported across that network each year.
This makes the railway one of the more defensive options on the market. It also means that Canadian National generates a diversified, growing source of revenue, which it can use to continue growing that dividend.
That’s a key factor for a dividend snowball. A dividend that continues to grow can compound much quicker over long periods of time. And in the case of Canadian National, the railway has provided annual upticks to that dividend for 30 consecutive years.
Canadian National gives investors a reason to keep adding
Canadian National’s latest quarterly results show why the company remains a long-term option for investors.
In the most recent quarter, the railway reported revenue of $4.75 billion, reflecting an 11% increase. Adjusted earnings per share increased 11% in the quarter, while revenue ton miles, which is a measure of freight volume, rose 5%.
Among the main drivers of that growth were grain and energy products.
What this shows investors is something encouraging. Canadian National is finding ways to continue growing, even when the market is full of volatility relating to trade and consumer spending.
Management was confident enough in that momentum to raise its full-year outlook based on improved freight-volume expectations and adjusted earnings growth.
Are you buying Canadian National?
Canadian National combines an irreplaceable rail network with a business that continues to grow. Throw in the quarterly dividend with three decades of consecutive annual increases, and you have a top contender for any income-seeking investor.
In my opinion, Canadian National is a great addition to any larger, well-diversified portfolio.
Buy it, hold it, and watch that dividend snowball begin to roll.
