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Summary

  • For each S&P 500 industry sector, I will be taking a look at available companies to help determine the best stocks for income investors.
  • In determining the best stocks per industry, I will be examining both the dividend growth and dividend yields of the stocks.
  • Out of this group of Railroad stocks, I feel that Union Pacific is currently the best long-term option for income investors.

Overview

In this series of articles, I will be identifying which S&P 500 stocks for various S&P industries are best suitable for income investors, based on dividend growth and yield. For Part 23, I will be taking a look at Railroad stocks. These stocks include:

  • CSX Corp (NYSE:CSX)
  • Kansas City Southern (NYSE:KSU)
  • Norfolk Southern (NYSE:NSC)
  • Union Pacific (NYSE:UNP)

When ranking the dividend paying stocks by yield, the order is as follows:

  • Norfolk Southern - 2.24%
  • CSX - 2.15%
  • Union Pacific - 2.03%
  • Kansas City Southern - 1.03%

When ranking them by dividend growth over the past five years, the order is as follows:

  • Union Pacific - 270.40%
  • CSX - 118.20%
  • Norfolk Southern - 67.65%
  • Kansas City Southern - 43.59%

When going back and looking at the past ten years, the order of stocks based on dividend growth is:

  • CSX - 860.00%
  • Union Pacific - 566.70%
  • Norfolk Southern - 470.00%
  • Kansas City Southern - 43.59%

Kansas City Southern has the lowest yield and lowest growth (KSU has only been paying dividends since 2012). Because of this, I will only be taking a closer look at the remaining three stocks in this group.

In terms of revenue, Union Pacific has seen the highest revenue growth over the past five years, while CSX has seen the lowest revenue growth.

CSX Revenue (<a href=

CSX Revenue (TTM) data by YCharts

When looking at earnings, Union Pacific has also seen the highest growth over the past five years, while CSX has seen the lowest growth (nearly identical with Norfolk Southern).

CSX EPS Basic Chart

CSX EPS Basic (TTM) data by YCharts

In terms of valuation, Union Pacific is trading at a slightly higher premium compared to both CSX and Norfolk Southern.

CSX PE Ratio Chart

CSX P/E Ratio (TTM) data by YCharts

Conclusion

Out of the stocks in this group, I believe that Union Pacific is currently the best long-term option for income investors. While Union Pacific doesn't offer the highest yield out of this group, it does offer the highest growth over the past five years and second highest growth over the past ten years. Considering the difference in yield between Union Pacific and Norfolk Southern is less than a quarter of a percent, I believe the added dividend growth makes up for the slightly lower yield.

When you also consider that Union Pacific has seen both the highest revenue growth and earnings growth out of this group of stocks, the case for owning Union Pacific becomes even stronger. The company also has the lowest debt to equity ratio, 0.45x compared to 0.91x and 0.83x for CSX and Norfolk Southern respectively.

In its latest quarterly report, Union Pacific reported terrific performance with earnings up 21%, operating revenues up 10%, operating income up 17%, and an operating income improvement of 2.2 points.

I believe that long-term investors in Union Pacific will continue to be rewarded with significant growth in both dividend and price appreciation over the years. As always, I suggest individual investors perform their own research before making any investment decisions.

Source: The Best Dividend Growers, Part 23: Union Pacific