Saturday, February 6, 2016

Canadian National Railway - A Case Study for Dividend Growth

Following our retirement income generating strategy that I describe in my book Retired At 48 - One Couple's Journey to a Pensionless Retirement, our goal has been to pick solid Canadian companies that are paying a dividend of at least 3% or more at the time of our purchase.  Obviously that yield will rise or fall as the share price decreases or increases respectively, especially if the company does not raise (or lower) its dividend payout.

We made a major exception to this rule when we purchased shares of Canadian National Railway (CNR) in January 2012.   (Note: due to a 2 for 1 stock split that occurred in 4th quarter 2013, all share prices and dividend yields prior to this have been halved so that we can have an apples to apples comparison).  At the time of our purchase, the yield on this stock was around 1.92%, which was below our 3% threshold.  But this was such a solid, blue chip stock in a different industry from our many Financial sector holdings, so we wanted to add it to our portfolio nevertheless.

Looking back at what has happened to our CNR shares entering our fifth year of holding this stock, we can easily see that we have been vindicated with this purchase.  Every year since our purchase, and for many years prior to that, Canadian National Railway has been raising its dividend every January, in time for their first quarter payout in March.  These increases have not been token 1-2% raises like some other companies have offered (just so that they can say they raised their dividend), but good healthy double-digit raises of 15-25%.  Considering that the dividends from our stocks represent our retirement income which replaces the employment income that we used to earn while we were still working, you could say that CNR is one of the best employers that we have ever had.

Since our 2012 purchase, not only has the dividend per share risen steadily, but the share price has risen as well.  As a result, the dividend yield relative to market price has remained more or less the same over the years–hovering between 1.7-2%.  Yet look at the dividend yield relative to our initial purchase price.  By 2015, it had exceeded our old 3% threshold and continues to climb each time CNR raises its dividend again.  The 20% raise in dividend announced January 2016 (despite overall rocky market conditions in 2015) bumps our yield to 3.85% relative to our original purchase price.  And had we had the forethought to buy this stock back in 2009, our relative yield would be almost 7% by now.

Canadian National Railway has turned out to be a perfect buy and hold stock for our portfolio.  It was good that we did not allow ourselves to be turned off by the initial impression of a "low yield", but instead, bought for the long term.  If CNR keeps increasing its dividend at this rate, the sky's the limit for the future.  This is a lesson that we need to keep in mind for any further stock picks.

 We are not even taking into consideration the enormous rise in the value of our stock since we bought it, since the share price has almost doubled over the past four years. Given how the share price is transient and could fall at any time, we don't want to put too much weight on its current value.  Still it is good to know that if we ever were forced to sell these shares, unless the price really tanks, we could make a tidy profit.  Hopefully we never get to that point though, because then we would literally be selling the goose that lays the golden egg.