Many investors tend to focus solely on yield, however long-term investors know the power of compounding growing dividends provide long-term investors over significant spans of time.
Companies such as Canadian National Railway Company (TSX:CNR) with yields of 1.7% may not seem appealing to an income-focused investor at first glance, however when taking into consideration CNR’s annual dividend growth rate, an investor willing to accept a short-term dividend yield of 1.7% will see a dividend yield of 3%-4% within a decade or so, alongside a high probability of capital appreciation should economic growth continue as projected in the medium to long-term.
CNR is one of the top choices for many long-term investors for a number of reasons, including the railroad’s aforementioned sensitivity to economic growth patterns, however, one thing this company is not typically known for is the strength of its dividend.
Investors considering buying a company with a 7%-10% yield will in turn often be giving up a large percentage of the capital appreciation upside a company like CNR provides, and will be taking on excess dividend risk (risk of a dividend cut or a reduced dividend, or alternatively financial distress should the company have difficulty making dividend payments with the free cash flow generated from the operating business).
Canadian National Railway is poised to take advantage of some pretty impressive growth expected to come out of the Canadian economy for 2017 and 2018, making this a fantastic long-term pick for investors with the appropriate time horizon.
Invest wisely, my friends.
