As of today, the S&P/TSX 60 index has enjoyed a robust uptick, rising by 18.99% year to date—a boon for Canadians invested in their home market.
However, not all the blue chips of the Canadian economy are riding this upward wave. Among them, Canadian National Railway (TSX:CNR) stands out, having declined by 10.66% over the same period.
Currently, Wealthsimple lists CNR with a modest dividend yield of 2.25%. While this yield might not turn heads at first glance, it does pique my interest as a potential beacon of value.
Rather than focusing solely on its current income generation, let's explore deeper to understand whether CNR's dividend yield might signal a worthwhile buying opportunity.
Why do I care about CNR's dividend yield?
As a dividend investor, my interest in dividend yields extends beyond the immediate financial return they provide.
Yes, the income is beneficial, especially when it's from tax-efficient, eligible Canadian dividends. However, my focus is often on what the dividend yield signifies about the stock's value.
The dividend yield is determined by dividing the annualized dividend by the stock price. Thus, if the stock price falls while the dividend remains stable, the yield rises. This inverse relationship between stock price and yield can serve as a useful indicator.
For a company like CNR, known for its stability and history of not just maintaining but frequently raising its dividends, a spike in yield could suggest that its shares are trading at historically low prices.
Analyzing CNR's current dividend yield
Currently, CNR's trailing 12-month dividend yield sits at 2.25%, according to the DivTracker app. This is 31% above its five-year average, a significant uptick.
It's important to highlight that during this period, CNR has not reduced its dividend payouts; rather, it has consistently increased them. For instance, in September 2022, the dividend was $0.73 per share, which rose to $0.79 in September 2023 and further to $0.84 by September 2024.
Over the last five years, the dividend growth rate has been an impressive annualized 9.5% despite the low overall yield. Remember, dividend growth > dividend yield.
Despite this positive dividend trend, there hasn't been any particularly negative news recently to justify the stock's price drop, apart from earlier concerns about potential strikes, which have since subsided.
The decline seems to be more about the broader market dynamics, with investors currently favouring sectors like utilities and pipelines, which are perceived as being more sensitive to interest rate cuts.
Given the historical resilience of CNR's dividends and its current high yield in an out-of-favour industry, I see a strong buying opportunity. CNR's enduring status as part of a railway duopoly in Canada adds to its appeal.
