The Case to Buy the Canadian National Railway Company

Here’s why dividend investors should love the Canadian National Railway Company (TSX:CNR)(NYSE:CNI).

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If only every stock I picked was like the Canadian National Railway Company (TSX:CNR)(NYSE:CNI).

Since I wrote my first column about the stock back in November 2013, shares of the railroad giant have delivered a 40% total return, including dividends. During that time, the company has hiked its distribution by more than 45%!

Of course, you can’t buy past returns. However, there’s reason to believe that CN will continue to post steady profits for shareholders. Now, where the stock goes in the short term is anyone’s guess. But over the long haul, I expect investors will be well rewarded.

Here’s why.

1. CN has a big wide moat

In days of yore, a castle was protected by the moat that circled it. The wider the trench, the more easily a castle could be defended. The same is true in business. The castle is the company and the moat is the competitive advantage the business has. We want the trench around the operation to be broad and deep in order to fend off all competition.

CN has a moat more than a mile wide that is filled with angry mutant alligators. The company’s rail lines were laid nearly a century ago, back when land was cheap. Over time, cities, towns, and businesses have been built around these tracks.

There’s no way you could replicate CN’s network today. The cost to secure the needed right of ways and buy out every landowner would be in the hundreds of billions of dollars. As a result, CN is able to crank out oversized profits year after year without the worry of new rivals eating into margins.

Rail is also the cheapest method of shipping goods over long distances. Today’s trains can move a ton of freight more than 180 kilometers on a litre of diesel. That’s four times more fuel efficient per ton-mile than trucking.

This gives railroads a permanent cost advantage. So, as long as we’re moving stuff around this country, CN is going to get its share of the business.

2. CN cranks out dividends

This competitive advantage means CN is gushing profits that it passes on to shareholders.

Since 2010, the company has more than doubled the size of its dividend. Today, the stock pays out a quarterly distribution of $0.31 per share, which comes out to an annual yield of 1.5%.

cnraildividend2

Source: CN Investor Relations

However, dividends are only one part of this story. CN also has a ravenous appetite for its own shares. And when the company buys back its own stock, it shrinks the total number of shares outstanding.

Here’s how it works. Let’s say in 2010, you purchased 10 million CN shares. Back then, the company had about 1 billion shares outstanding, which means you owned 1% of the total investor pie. Since then, CN has bought out nearly 20% of its investors, taking down the total share count to about 800 million. You still own 10 million shares, but now your position represents 1.25% of the company.

This is why I love buybacks. Without adding a single share, we were able to increase our stake in a wonderful business tax free.

3. CN is a bet on Canada

Because of the company’s strategic position in the country, CN is a wager on Canadian prosperity. However, I have always considered an all-in bet on Canada’s economic future to be pretty much a sure thing.

Now, it won’t be a smooth ride. During the next century, you can expect 15 or so bad years. And of course, no one can predict in what order they’ll occur. But over the next 100 years, we’re going to have more people living in this country. In time they’re going to use more goods. CN will play a vital role in moving those products across the nation.

Bottom line, if you’re looking for a stock to impress your friends, then CN isn’t for you. But if you like good old fashion dividends and are willing to trade being the life of your next cocktail party for reliable profits, then you’ll like this stock just fine.

Should you invest $1,000 in Frontera Energy Corporation right now?

Before you buy stock in Frontera Energy Corporation, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Frontera Energy Corporation wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Energy Stocks

A meter measures energy use.
Dividend Stocks

Where I’d Invest $15,000 in Top Utilities Stocks for Steady Income

These utility stocks are some of the top choices, but they aren't the usual group of investments.

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

How I’d Allocate $1,000 in Energy Stocks in Today’s Market

Discover why energy stocks are crucial for Canadian investors as the election approaches amidst tariff challenges.

Read more »

oil and natural gas
Energy Stocks

3 Canadian Energy Stocks to Buy and Hold for Decades of Passive Income

Energy stocks can be some of the best choices for consistent income, and these three remain top performers.

Read more »

oil and gas pipeline
Energy Stocks

Why Billionaires Are Pulling Cash Out of U.S. Stocks and Buying Canadian Energy

This analyst-recommended energy stock could be one to watch in 2025.

Read more »

oil pump jack under night sky
Energy Stocks

Top Energy Stocks to Invest in 2025

Most investors are avoiding energy stocks over fears that Trump tariffs could bring a structural change in the energy supply…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Why I’d Include These 3 Essential Dividend Stocks in My TFSA

Here are three dividend stocks I’d include in my TFSA today.

Read more »

Asset Management
Energy Stocks

Why I’d Consider These 3 Small Caps for a $5,000 Investment With Long-Term Horizons

Investing in small-cap stocks such as Vecima and Total Energy should help you deliver outsized gains over the next 12…

Read more »

canadian energy oil
Dividend Stocks

How I’d Invest $4,000 in Canadian Small-Cap Stocks to Potentially Double My Money

This year I'm buying energy stocks like Suncor Energy Inc (TSX:SU).

Read more »