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The 1 Dividend-Yielding Railroad Company You Need to Know

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The recession may continue for years. To protect your portfolio in such uncertain times, I recommend looking into a dividend-yielding company. Not only does a dividend motivate companies to more efficiently budget and deploy capital, but dividend-yielding companies can provide you with a nice quarterly paycheck for all of your budget needs. Moreover, dividend companies are usually considered "stable," or capable of safeguarding your principal investment.

The first place investors often turn to are railroads. These historic businesses elicit strength and confidence. Luckily, we have three reasons to be bullish on the entire industry. But, before you invest, you may be surprised to learn that the biggest player may not be the best way to grow your portfolio.

Chugging along economic trends
Whether the economy picks up or slows down, railroads are well-poised to benefit.

First, railroads are efficient. They are three times more efficient than trucks, and one train can take up to 300 trucks off the road. So, whether the material is coal or cars, railroads are key to transporting goods.

Second, infrastructure in the US will need updating. Whether the government takes a more active role, one thing is certain: If a project is vital to the needs of the U.S., it will be built, and railroads will be integral to the material transportation.

Third, everyday Americans are buying again. After putting off big purchases for five years since the downturn, many Americans now recognize that they need to replace their cars. Moreover, Fool writer Sean Williams notes that homebuilding sentiment is at a six-year high. As a result, U.S. rails have hauled 11.8% more carloads of lumber in the first half of this year. 

The biggest and baddest is not the best investment
Perhaps, the obvious choice for your portfolio is Union Pacific (NYSE: UNP  ) . As America's largest railroad, it controls railroad operations in 23 states in the western two-thirds of the U.S. Moreover, it's international -- its rails connect with Canada's rail system and is the only railroad serving all six major gateways to Mexico. From a macroeconomic perspective, Union Pacific seems like a great, stable company.

Unfortunately, it doesn't seem like it's a great dividend stock. For the past three years, the company's dividend yields have decreased to the point that it doesn't even beat the current 2% average of the S&P 500.

 

2011

2010

2009

Dividend Yield

1.60%

1.80%

2.30%

Source: 10-Ks from 2009-2011 (Fiscal Year Ending in December). 

Looking more deeply into the earnings and dividends growth, we see Union Pacific's earnings have increased more than dividends.

 

2011-2010

2010-2009

% Change in Earnings Growth

26.90%

66.13%

% Change in Dividends Growth

26.03%

11.09%

Source: Author's Calculation from 10-Ks from 2009-2011 (Fiscal Year Ending in December).

Although the increasing earnings are great for most investors, income investors should be wary that Union Pacific won't support its dividend yield.

Luckily, there is one company that you can profit from while protecting yourself of any downside.

The little train that could
Operating in 22 states on the Eastern half of the U.S., Norfolk Southern (NYSE: NSC  ) has successfully protected its dividend for the past three years.

 

2011

2010

2009

Dividend Yield

2.28%

2.23%

2.59%

Source: Y-Charts (Fiscal Year Ending in December).

Even nicer, Norfolk Southern has consistently improved its ability to fund its dividend, (Here, the lower the percentage, the more earnings the company has on hands to pay dividends.)

 

2011

2010

2009

Dividend Payout Ratio

30.06%

34.36%

48.36%

Source: Author's Calculation from 2009-2011 10-Ks (Fiscal Year Ending in December).

But can Norfolk Southern sustain its business and fight off competition?

Yes, it can. First, Norfolk Southern is one of the top two railroad companies in the eastern U.S. It must compete with CSX Corporation (NYSE: CSX  ) , which also operates across the Eastern U.S., but I don't see it as much of a threat. Given the macroeconomic trends, both are sure to benefit.

Secondly, if you're worried that railroads are incredibly capital intensive, don't. Though free cash flows were down in 2011, Norfolk Southern is still well-positioned. Not only has Norfolk Southern continued to pay down debt, but it has increased its ability to pay down debt year over year.

 

2011

2010

2009

Free Cash Flows

$326M

$908M

$449M

Interest Coverage Ratio

7.41

6.12

4.47

Source: Author's Calculation from 2009-2011 10-Ks (Fiscal Year Ending in December). FCF from YCharts.

The Foolish Bottom Line
Considering the macroeconomic forces in play, railroads are sure to benefit. Understandably, you may still be wary -- we've been through the worst economic downturn since the Great Depression.

By choosing the "smaller" Norfolk Southern for your portfolio, you can benefit from any upside in the market, while ensuring your fat dividend keeps arriving on time.

If you're interested in some of these dividends on your quest for high-yielding stocks, the Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here to discover the winners we've picked.

 
 
 

Fool contributor Kevin Chen has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Kevin Chen
TMFKang

Kevin Chen covers the tech sector in China. With degrees in history and economics, he scours government sources, magazines, blogs, and earnings reports before making any investment decision. You can follow him at @TMFKang or on Google+.

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Related Tickers

10/29/2014 4:05 PM
NSC $110.68 Down -0.62 -0.56%
Norfolk Southern C… CAPS Rating: *****
UNP $114.97 Down -1.21 -1.04%
Union Pacific Corp CAPS Rating: *****
CSX $35.40 Up +0.11 +0.31%
CSX Corp CAPS Rating: ****

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