Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.

Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. See last week's selection.

This week, we'll take a closer look at the downtrodden railroad sector and I'll point out why CSX (NYSE: CSX) could be a major bargain for income investors.

A dirty derailment
All is not well in the land of railroad transportation if you weren't already aware. Railroad companies like CSX rely on strong consumer demand to drive merchandise shipments (i.e. anything that's not a metal or resource), the ability to pass along fuel surcharges to its customers, and moderate to strong coal demand from the utility sector to drive growth. In every respect, railroads are struggling at the moment.

Coal revenue, which makes up close to a third of all revenue for some railroad companies, is suffering from very weak demand amid a large drop in natural gas prices. Electric utilities across the U.S. have been making the costly one-time switch to natural gas plants from coal-powered facilities. In response, some of coals largest producers, like CONSOL Energy (NYSE: CNX), cut production, and in CONSOL's case, even cut back on its workweek to just five days.

CSX's peers Norfolk Southern (NYSE: NSC) and Union Pacific (NYSE: UNP) have both felt the pinch because of lower coal shipments. Norfolk lowered its third-quarter forecast last week to a level that was 24% below Wall Street's expectations at the midpoint of its guidance. Union Pacific's third-quarter profit, on the other hand, was a record; however, it was still hampered by a 17% decline in coal volume. CSX fared no differently, as exported coal and other product shipment growth was wiped out by electricity shipments to make total shipping volume flat.

So why buy now?
So by now you're probably wondering why, if there are so many negatives surrounding the railroad sector, why on earth should you consider CSX? Believe it or not, there are plenty of reasons.

To begin with, even with coal prices weakening and supply remaining high, the long-term outlook for coal consumption is still strongly intact both within the U.S. and around the world. Coal still drives about 45% of all energy production in the U.S. according to the Energy Information Administration. Even though production is expected to decline by 6% in 2012, prices and supply will soon stabilize given the fact that coal isn't going to disappear from the U.S.'s energy picture for a very long time.

Coal companies are also looking for opportunities internationally which could bode well for CSX. Recently I detailed a long-term agreement between Arch Coal (NYSE: ACI) to ship coal out of Gulf of Mexico ports, which is in addition to existing deals it's signed with western ports. Arch anticipates boosting its exports fourfold by 2020. Rail transportation is going to be a key component to companies like Arch in the coal sector looking for growth avenues overseas.

Another aspect you can't overlook with CSX is its operational efficiency. CSX has done a remarkable job keeping its costs under control in far from ideal circumstances. CSX's second-quarter results highlight the 10th straight quarter of earnings growth, and demonstrated a 60 basis point rise in the company's operating ratio to 68.7%. It's also worth noting that in terms of transport per ton, trains are considerably more fuel efficient than trucks, so the rising price of fuel also tends to work in their favor.

Now for the encore
Now for the real reason CSX has been chugging its way into income investors' hearts in recent years: its dividend. CSX's yield of 2.6% isn't going to leap off the charts; however, its growth in recent years has been nothing short of phenomenal. Have a look:


Source: Dividata, * = assumes quarterly payout of $0.14.

Doing the math here, in light of the worst recession in 70 years, CSX has averaged annual dividend growth of 31.4% over the past seven years -- Wow! CSX's ability to prudently control costs, and its payout ratio that is just 28%, leaves plenty of room for future dividend growth.

Foolish roundup
The railroad sector may not be the first sector that comes to mind when you think of immediate buys, but it should remain an integral part of the U.S. energy picture for a very long time. Long-term investors should be utilizing this weakness to scoop up premium names in the sector like CSX that offer a good dividend yield at 2.6%, impressive payout growth, and are focused on controlling costs.

Our analysts at Motley Fool Stock Advisor have a particularly keen eye on the energy sector and one company in particular that they feel you should own before 2014. Find out the identity of this company and the reason they're so excited by clicking here to get your copy of this latest, free, special report.