TFSA Alert: A Top Canadian Dividend-Growth Stock to Start the New Year

Canadian National Railway Company (TSX:CNR)(NYSE:CNI) has made some long-term investors quite rich.

| More on:

Get started today reminder note

Young Canadian savers are searching for reliable dividend-growth stocks to add to their TFSA portfolios.

The strategy makes sense for all investors, but millennials who are looking to set up a retirement fund can probably benefit the most by using the TFSA.

Why?

The TFSA is an appealing alternative to the RRSP when an investor believes his or her income will rise in the coming years.

Using the TFSA at the beginning of your career, when earnings are likely at their lowest, allows you to bank RRSP contribution room to be used down the road when you are in a higher tax bracket.

One way to harness the power of the TFSA is to own dividend stocks and invest the distributions in new shares. This sets off a compounding process that can turn a modest initial investment into a nice nest egg over the course of two or three decades.

Which stocks should you own?

The best companies tend to be market leaders with wide moats and long track records of dividend growth.

Let’s take a look at Canadian National Railway Company (TSX:CNR)(NYSE:CNI) to see why it might be an interesting pick.

Wide moat

CN is the only rail operator in North America with tracks connecting three coasts. This is a big competitive advantage that should continue for some time, as attempts to merge railways tend to run into significant regulatory roadblocks, and the odds of new lines being built along the same routes are pretty slim.

Efficient operations

CN still has to compete with trucking companies and other railways on some routes, so management works hard to ensure the operations are as efficient as possible.

The company regularly reports the best operating ratio in the industry, and CN is widely viewed as the best-run business in the sector.

Diverse business lines

As the backbone of the Canadian and U.S. economies, CN carries everything from crude oil and coal to lumber, grain, consumer goods, and cars. When one group hits a slump, the others tend to pick up the slack.

U.S. exposure

In addition, a large part of the revenue and earnings is generated in the United States. This provides a nice hedge against a downturn in the Canadian economy, and profits can get an extra boost when the U.S. dollar strengthens against the loonie.

Dividend growth

CN’s dividend yield might not be very attractive, but the history of dividend growth is certainly impressive. In fact, the company has a 20-year compound annual dividend-growth rate of about 16%.

That’s important for long-term investors who use the distributions to buy additional shares.

What about returns?

A $10,000 investment in CN just two decades ago would be worth more than $250,00 today with the dividends reinvested.

The bottom line

There is no guarantee CN will generate the same returns over the next 20 years, but the company remains an attractive pick for buy-and-hold TFSA investors.

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 Andrew Walker has no position in any stock 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.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »