Perhaps one of the greatest business minds in history, Bill Gates has a knack for forward thinking and seeing what the future holds. Accordingly, investors ought to take a look at his investments in his endowment fund run by Cascadia Investments. When one digs into the numbers, one finds that Canadian National Railway (TSX:CNR)(NYSE:CNI) is one of Gates’s primary holdings.
In fact, Bill Gates happens to be the largest single shareholder of CN. Let’s dive into why that may be the case and what might be behind this investment. (Hint: I’ll be looking at the income argument for owning CN).
Dividend component important
What has perhaps gone unnoticed with CN is the company’s dividend and dividend-growth rate over time. The company’s current yield of 1.8% isn’t anything special. At first glance, it can be easy to gloss over a yield like this. However, I think CN’s dividend play an integral role in its investment thesis for a couple reasons.
First, 1.8% is still a better yield than what the bond market is offering today. This is an important factor for investors to consider. A 1.8% yield is the 3% or 4% equivalent of a few years ago. It can be hard to grasp this concept, but with interest rates and bond yields likely to stay low for a very long time, investors need to get used to lower equity yields as well. Additionally, this low yield reflects the safety and defensiveness CN provides, as investors look for high-quality cash flow-growth companies today.
Dividend growth more important
Most importantly, in approximately five years, CN has doubled its dividend distribution to shareholders. It turns out capital appreciation with this stock has outpaced its rate of dividend growth. This has led to a declining yield, despite a payout that’s grown at a speedy clip in recent years.
CN’s commitment to continuing to raise its dividend meaningfully each year is important. Those with very long-term investment time horizons, such as endowment funds or very wealthy individuals like Bill Gates, want to invest in companies that may have relatively low yields today but grow their dividend distributions at a rapid rate over time. Additionally, companies like CN that have the potential to maintain this rate of growth are even more desirable.
CN’s dividend is just one factor to consider, but is an oft-overlooked one. I think Bill Gates’s choice in CN is an excellent one. After all, who am I to contradict his track record?
I think CN stands as one of the greatest long-term wealth accumulation tools available to investors today. This stock is more expensive than its historical average but worth the premium today.
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