Just like in Monopoly, owning railways in real life can be a solid investment strategy. In the board game, you earn money every time someone lands on these tiles; in the real world, your profits come from long-term share price appreciation and periodic payments known as dividends.
In Canada, the main players on the tracks are the Canadian National Railway (CNR) and the Canadian Pacific Kansas City (CP). The former criss-crosses Canada, while the latter has tracks leading down into the U.S. and even all the way to Mexico!
Both railway stocks have been excellent long-term investments, with an initial $10,000 investment growing steadily over decades largely thanks to the power of reinvested, growing dividends.
Here’s what you need to know about holding these two Canadian railway stocks for dividends.
What Is A Dividend?
A dividend is essentially a portion of a company’s earnings that is distributed as cash to shareholders. Let’s take a look at how this works with CNR and CP.
Both Canadian railways earn revenue from their operations—transporting goods across vast rail networks. This revenue flows into the company’s income statement, covering expenses like operations, maintenance, employee salaries, taxes, and more.
Once all operational costs are accounted for, the remaining profit can be allocated in several ways. The company might reinvest in itself through research and development, buy back its own shares to increase stock value, or return some of this profit to shareholders in the form of cash dividends.
Why Are Dividends Important?
However, as good as they sound, it’s crucial to understand that dividends aren’t exactly “free money.” Typically, a stock’s price adjusts downward by the amount of the dividend paid, though market conditions can influence the actual price movement.
Despite this adjustment, reinvesting dividends is still a wise investment strategy. It uses the dividend payments to purchase more shares, which in turn will generate its own dividends, creating a compounding effect over time. This “snowball” can significantly boost the growth of your investment.
In the case of CNR and CP, these Canadian railway stocks have not only offered steady dividends but have also demonstrated strong dividend growth – meaning that each year, both companies tend to increase the amount of cash dividends paid out.
Over the past five years, CP has increased its dividends at an annualized rate of 11.3%, while CNR has achieved an 8% annualized growth in dividends as of March 2024.
This ability to consistently grow dividends provides an additional layer of compounding, as shareholders benefit not just from reinvesting dividends, but also from increasing dividend payouts year over year.
Investors should note that, unlike other companies, neither CNR nor CP offers a dividend reinvestment program (DRIP) for shareholders.
What Is A Dividend Payment Date?
There are three key dates to keep in mind if you’re investing in a stock for its dividends:
- Ex-dividend date: This is the crucial date. If you buy the stock on or after this date, you will not receive the next dividend payment. Instead, the seller will. To receive the next dividend, you must purchase the stock before this date.
- Record date: This is the date on which the company looks at its records to determine who the shareholders are. With markets like the U.S. and Canada moving to T+1 settlement, which means the trade is settled one business day after the trade date, the record date has effectively become the same as the ex-dividend date.
- Payment date: This is when the dividend is actually paid out to shareholders. Note that the exact arrival of the cash can vary depending on your broker.
Key takeaway: If your goal is to collect the dividend, ensure you purchase the stock before the ex-dividend date and hold it at least until this date. However, remember that the stock price typically drops by the amount of the dividend on the ex-dividend date, all else being equal.
CNR Dividend Dates 2024
CNRs dividend payment dates for 2024 are as follows:
| Fiscal Quarter | Record Date | Payment Date | Amount Per Share |
| 1st | March 7th, 2024 | March 28th, 2024 | $0.845 |
| 2nd | June 7th, 2024 | June 28th, 2024 | $0.845 |
| 3rd | September 6th, 2024 | September 27th, 2024 | $0.845 |
| 4th | *December 6th, 2024 | *December 27th, 2024 | *$0.845 |
Source: CN.ca
CP Dividend Dates 2024
CP’s dividend payment dates for 2024 are as follows:
| Fiscal Quarter | Record Date | Payment Date | Amount Per Share |
| 1st | March 28th, 2024 | April 29th, 2024 | $0.19 |
| 2nd | June 28th, 2024 | July 29th, 2024 | $0.19 |
| 3rd | *September 27th, 2024 | *October 30th, 2024 | *$0.19 |
| 4th | *December 27th, 2024 | *January 31st, 2025 | *$0.19 |
Source: CPR.ca
Advantages And Disadvantages Of Canadian Railway Stocks
If you’re considering investing in Canadian railway stocks, it’s important to understand the potential advantages and disadvantages that come with owning these stocks:
Advantages:
- Wide moat: Both CNR and CP operate within a duopoly in Canada, giving them a significant competitive advantage and making it difficult for new competitors to enter the market.
- Diversification: Investing in railway stocks can provide a good diversification benefit to your portfolio, especially if you’re heavily invested in other sectors like banking, pipelines, or telecommunications.
- Blue-chip stocks: Both CNR and CP are large, reputable companies with a history of stability and performance, making them attractive as long-term investments.
Disadvantages:
- Economic sensitivity: Railways are heavily dependent on the health of the economy. During economic downturns, reduced shipping volumes can negatively impact their profitability.
- Lower dividends: While CNR and CP have been growing their dividends, their overall yield is typically lower than that of banks, telecoms, or pipelines, which might not make them the best choice for income-focused investors.
- Derailments: Operational risks can have significant financial and reputational impacts on railways. The February 2023 derailment in East Palestine, Ohio with Norfolk Southern highlights the potential risks investors face.
How Is Dividend Income Taxed in Canada?
If you’re investing outside of a registered account like a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), or First Home Savings Account (FHSA), your dividend income from holding stocks, including Canadian railway stocks like CNR and CP, will be taxed.
There are two different possible tax treatments for dividends:
Eligible Dividends
These are typically paid by domestic companies that have already paid the general corporate tax rate. To avoid double taxation, the Canada Revenue Agency (CRA) provides a tax credit to shareholders. Eligible dividends come with a “gross-up” of typically 38%, which means you must add 38% to the dividends received to calculate your taxable income, but you’ll receive a corresponding tax credit that effectively reduces the tax burden.
Non-Eligible Dividends
These dividends are grossed up by only 15%. They are usually paid by private, smaller corporations that pay tax at a lower rate than the general corporate tax rate.
Both CNR and CP pay eligible dividends only. This means when you receive dividends from these companies, they are eligible for favourable tax treatment, including the gross-up and tax credit.
Final Thoughts
If you’re planning to be a shareholder of the major Canadian railways, knowing the dividend payment dates for CNR and CP is crucial, but it’s just as important to keep an eye on their earnings reports and monitor their dividend growth rates.
Remember, investing in these blue-chip stocks is about the long haul. Maintain a long-term mindset and stay the course, even when market volatility strikes. Stay informed, stay invested, and let compounding do its work over time.
