4 Dividend-Paying Railroad Stocks Your Portfolio Must Have

The U.S. equity market has been jittery of late as it has been engulfed by domestic as well as international issues. On the domestic front, investors seem to be getting increasingly anxious about President Trump’s capability to push through his pro-business agenda.

Moreover, the havoc wreaked by tropical storm Harvey has also hit certain sectors severely like the airlines. In fact, increased volatility on the back of a significant increase in the CBOE Volatility Index (VIX) indicate bearish market prospects.

Apart from domestic events, issues like the escalating North Korea-Japan tension and the terror attacks in Spain also resulted in markets being subdued, of late.

Given this backdrop, investing in companies that pay consistent dividends can make for wonderful investments. Such companies are financially stable and mature, and can even generate steady cash flow irrespective of market conditions.

Railroads Riding High on Coal Revival

A sector that boasts well-paying stocks in terms of dividends, is the one having railroad stocks. Notably, railroads are witnessing good times currently after having struggled in the past few years. The most important catalyst behind the upsurge is the revival pertaining to coal, which is a key revenue generating commodity for the sector participants.

The revival of coal can be made out from the impressive performances of most sector participants with respect to the commodity in the second quarter of 2017. For example, at Union Pacific Corporation (NYSE:UNP) coal revenues (freight) increased 25%, while the same at CSX Corporation (NASDAQ:CSX) and Norfolk Southern Corporation (NYSE:NSC) improved 27% and 32%, respectively.

Meanwhile, the bullishness surrounding the railroad operators is evident from a 12.3% increase witnessed in the Dow Jones U.S. Railroads Index, year to date. Furthermore, Trump’s pro-coal stance is also a boon for the sector.

Rebound in Intermodal Volumes – Another Positive

Apart from the improvement on the coal front, intermodal volumes have also improved this year after a disappointing 2016. According to the Intermodal Association of North America (IANA), intermodal volumes improved 2% year over year in the first quarter of 2017.

The scenario improved further in the second quarter with intermodal volumes rising 4.5%. In fact, this was the highest growth rate recorded in almost three years. The positive readings certainly support the air of optimism surrounding railroads.

Solid Price Performance

The improved scenario regarding railroads can be out from the fact that Zacks Rail industry outperformed the broader market so far this year. While the S&P 500 Index gained 11.7%, the industry added 14%.

Zacks Industry Rank Supports Favorable Scenario

The Zacks Industry Rank of 18 (out of 250 plus groups) carried by the Zacks Rail industry further highlights the attractiveness of railroads. The favorable rank places the companies in the top 7% of the Zacks industries.

We put our entire 250-plus industries into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1.

Click here to know more: About Zacks Industry Rank

Attractive Valuation

When valued according to the forward price-to-earnings (P/E) ratio for the current financial year (F1), the industry does not appear too expensive as it is trading at 18.7x P/E multiple. The reading appears favorable when compared with its own traded multiple (trading lower than the median of 18.9x) in the last 12 months as well as the S&P 500 (19.4x). The industry’s lower-than-market positioning calls for more upside.

Railroads+ Dividends = Winning Strategy

In view of the tailwinds mentioned above, we believe that stocks from the railroad space should be present in one’s portfolio. Moreover, dealing with dividend stocks is a prudent strategy during uncertain times like the current scenario as highlighted above. Markedly, the best dividend stocks that pay out a healthy yield and have strong prospects are less susceptible to market downturns.

Consequently, we have zeroed in on four stocks in this high flying space, which have a strong dividend paying history. Also, they have raised their dividend payouts in the past 12 months.

Canadian National Railway Company ( (NYSE:CNI) ) is engaged in the rail and related transportation business. The company, based in Montreal, Canada, currently carries a Zacks Rank #2 (Buy) and has a Value Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company has a dividend yield of 1.5%. It has hiked its dividend payments for many years. The latest hike was announced in January 2017, when the company’s board of directors approved a 10% dividend hike in its quarterly cash dividend.

The stock has seen the Zacks Consensus Estimate for current-quarter earnings being revised 5.9% upward over the last 60 days. For full-year 2017, the same been revised 6% upward in the same period.

Canadian Pacific Railway Limited ( (NYSE:CP) ), headquartered in Calgary, Canada, operates a transcontinental railway network in Canada and the United States. It currently sports a Zacks Rank #1 and has a Value Score of B. The company has a dividend yield of 1.1%. Over the last couple of years, the company has increased its annual dividend significantly. In May, the company raised its quarterly dividend per share by 12.5%.

The stock has seen the Zacks Consensus Estimate for current-quarter earnings being revised 4.3% upward over the last 60 days. For full-year 2017, the same been revised 5.2% upward in the same period.

Kansas City Southern ( (NYSE:KSU) ) has railroad investments in the United States, Mexico and Panama. The company, based in Kansas City, MO, has a Value Score of B and a dividend yield of 1.3%. Earlier this month, the company raised its quarterly dividend to 36 cents per share (annualized $1.44 per share), representing an increase of 9.1% over the previous payout.

The stock has seen the Zacks Consensus Estimate for current-quarter earnings being revised 1.5% upward over the last 60 days. For full-year 2017, the same been revised 1.8% upward in the same period. The company carries a Zacks Rank #3 (Hold).

Based in Omaha, NE, Union Pacific Corporation provides rail transportation services across 23 states in the United States. The company has a Value Score of B and a dividend yield of 2.3%. In November 2016, the company raised its quarterly dividend to 60.5 cents per share ($2.42 per share annualized), representing an increase of 10% over the previous payout.

The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 0.7% upward over the last 60 days. The company carries a Zacks Rank #3.

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