Retirees: Here’s a Cheap Safety Stock That Pays Big Dividends

Retired investors should feel more content in the dividend (growth) stocks that offer a smoother ride instead of chasing the names with artificially high yields and significant downside risks. Undoubtedly, it can feel tempting to go bottom-fishing for some of the market’s most beaten-down names.

But if you’re a retired income investor who relies on dividend payments to pay the bills in any given month, I’d argue that it makes little sense to raise your risk profile in a manner that could leave you at increased risk of an income reduction as a result of some dividend cut. Indeed, dividend cuts happen, and they can be devastating in more ways than one, especially if a cut comes as a surprise.

In any case, I think retirees should prioritize safety and stability through 2026. That means far more than just going for the high-yielding stocks with lower beta (that entails less correlation to the rest of the market), though. Instead, consider opportunities that entail a slight (or perhaps wide) discount. Of course, investors should conduct thorough due diligence when it comes to the harder-hit deep-value plays, as the “value trap” risk is real with opportunities that look too good to be true.

Of course, it’s perhaps better to go with a stronger long-term performer (think a long-term chart that goes from the bottom left to the top right) that may have been hit with a near-term pullback, preferably due to transitory issues that sparked a bit of an overreaction. Whenever you can buy a proven long-term winner at a discount due to matters that aren’t related to the long-term fundamentals, you may just be able to have dividend growth alongside gains as well. Of course, the longer your investment horizon, the better.

CN Rail

At around $130 per share, CN Rail (TSX:CNR) stock yields 2.8%, which is close to the highest it has been in recent memory. Undoubtedly, a sub-3% yield doesn’t seem all too enticing to income investors, but given CN Rail has historically yielded less than 2%, I’d argue that the dividend play is worth picking up right here, even as management looks to tackle a new slate of challenges in 2026.

Undoubtedly, I think CN Rail might wish to consider bringing new talent onto the management team to make up for lost time after losing 3% over the past five years. Indeed, it’s a historical low point for CN Rail, but for investors, there’s an opportunity to get a steep discount alongside a swollen yield from one of the market’s most durable dividend growers.

At 17.2 times trailing price-to-earnings (P/E), with a 0.86 beta, you’re getting a bit less choppiness with one of Canada’s older dividend growth stars, which, I think, is showing baby steps toward a hopeful return to form.

With the stock fluctuating wildly after a lukewarm quarter that saw revenue grow just 1% year over year, there might be an opportunity for CN Rail to start posting some beats against comparables that are bound to get easier. Either way, the quarter was not impressive, and the incremental operating ratio improvements, I think, could use a bit of a boost. All considered, CN Rail stock is a steady value play that will, in due time, get back on the rails again. Patient income investors might wish to consider nibbling into a position here and on any future strength.

The post Retirees: Here’s a Cheap Safety Stock That Pays Big Dividends appeared first on The Motley Fool Canada.

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More reading

• Build Enduring Wealth With These Canadian Blue-Chip Stocks
• 1 Magnificent TSX Dividend Stock Down 11% to Buy and Hold for Decades
• Best TSX Stock to Buy Right Now: CN Rail vs. CP Rail?
• 5 Top Stocks With High Dividend Growth to Buy Now
• Better Railway Stock: Canadian National vs Canadian Pacific?

Fool contributor Joey Frenette has positions in Canadian National Railway. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.