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How to Give Your TFSA Passive-Income Fund a Massive Raise Every Single Year

Joey Frenette
Arrowings ascending on a chalkboard

Some stocks deserve a permanent spot reserved for them in your TFSA. Dividend-growth kings that have a multi-decade-long track record of posting above-average growth and a moat that’s wide enough to secure a similar magnitude of gains for the decades that lie ahead are precisely the types of investments that you should buy and hold for as long as you’re able.

When it comes to superb dividend-growth stocks with wide moats, it’s hard to beat the railways. The rails comprise a considerable portion of the portfolios of both Warren Buffett and his good friend Bill Gates. What some less-experienced investors see as boring businesses with little room for upside surprises, others, like billionaire money managers, see the rails as highly predictable gravy trains that’ll allow one to tame market volatility while obtaining better-than-average results over time.

At this juncture, it’s hard to beat the long-term returns that have been posted by Canadian National Railway (TSX:CNR)(NYSE:CNI), a big Bill Gates holding and one of the highest-quality companies on the entire TSX index. On the surface, CN Rail is an old-fashioned, economically sensitive business with an almost negligible dividend, which currently yields 1.75%. What many new investors fail to see, however, is that CN Rail has one of the fastest-growing dividends out there.

Keep those raises coming!

Look at it this way: if you’re looking to maximize your chances of getting a high double-digit percentage raise every single year, something that’s nearly impossible for folks in the workforce, you’re going to need a free-cash-flow-generative business with a track record of outperformance and a moat that’s wide enough to protect its future growth runway. And, of course, you’ll always need to consider the price you’ll pay at any given time, because even the best business in the world isn’t a good investment if you end up overpaying.

Canadian National Railway is arguably the most robust dividend-growth stock out there with over two decades’ worth of consecutive dividend raises under its belt. Not only is the streak impressive, but the generosity and magnitude of each dividend raise. CN Rail has rewarded its shareholders with double-digit percentage dividend increases — something nearly impossible for most other dividend growers thanks to the width of CN Rail’s moat, which has kept competitors away from its slice of the pie.

Of course, to support such double-digit percentage dividend hikes, the company is going to need to pull the right growth levers moving forward.

Full speed ahead!

More recently, management took the opportunity to reaffirm guidance at its Investor Day meeting. EPS is expected to grow at a low-double-digit rate this year, which is pretty impressive considering the recent slowdown in the economy. In addition, CN Rail is guiding for low-double-digit EPS growth through 2022 thanks in part to its robust revenue growth pipeline.

Management also shed light on its acquisition strategy moving forward. The firm emphasized that it’ll only pursue “opportunistic” deals that stand to produce ample synergies. That’s a sound M&A strategy if you ask me; many Canadian firms that have had the urge to merge have posted massive double-digit growth results over prolonged periods of time.

Foolish takeaway

CN Rail is a buy here — plain and simple. The premium price tag (19.6 times next year’s expected earnings) is more than worth the beyond-premium business that you’re getting.

CEO J.J. Ruest is doing a heck of a job, and as the company goes on the hunt for strategic deals with a full growth pipeline and a gradually recovering economy, I see plenty of upside and for those long-term thinkers. The huge dividend hikes will act as an incentive to stay in the name forever.

All aboard!

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of Canadian National Railway. 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.

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