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It's been a mild winter here in Bumpass, Virginia. We had thunder-snow yesterday, but with the 42 degree temperature, it melted quickly. This mild weather has put a damper on energy usage, especially coal and wood. My daughter got a good deal on two dump truck loads of fire wood due to lack of demand. The high price of diesel fuel has hurt her trucking business as it has affected long-haul truckers. One industry in the transportation sector that has done well is railroads.

Railroads have efficiencies for long-haul deliveries of bulk materials, such as coal, metals, metallic ores, petroleum chemicals and farm products. "Put another way, trains are anywhere from 1.9 to 5.5 times more fuel efficient than trucks. No wonder companies that have rail access are making the switch." Manufacturing is picking up and providing more jobs in this slow growth economy. Freight rates are rising due to contract renewals and built in surcharges. Transportation is one of the first industries to respond to the demand pickup at the beginning of a business cycle.

Retirement portfolios should provide income from many GICS sectors for diversification. I personally allocate investments to stocks in all 10 sectors. Industries such as transportation are classified under the industrial sector, but are associated with the consumer cyclical sector due to the shipping required for consumer goods and services. Railroads can provide good growth for the young investor and growing income for the retiree. Preservation of capital is important to me, as a retiree, during the current secular bear market. This week I will profile three railroads: Canadian National (NYSE:CNI), Norfolk Southern (NYSE:NSC), and (NYSE:CSX). I already covered (NYSE:UNP) in a previous article. Data from David Fish's CCC charts and Yahoo Finance.

  1. Canadian National Railway Company --Transportation Industry. Canadian National Railway Company, together with its subsidiaries, engages in the rail and related transportation business in North America. It provides transportation for various goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, and intermodal and automotive products. The company operates a network of approximately 20,600 route miles of track that spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico. This Dividend Contender has 16 years of increasing dividends. The current yield is 1.9%*. The 5-year dividend growth rate is 18%, while last year's dividend growth rate was 25.4%. The current P/E is 14.28. The projected earnings per share growth rate for next year is 11.7%, while for the next 5-years it is 13.8%. The company is fairly valued at the current price of $78. There is corporate intrigue between CNI and CP rail with Bill Ackman of hedge fund Pershing Square Capital Management trying to take control of CP rail and move the former CEO of Canadian National, Hunter Harrison in as new CEO of CP rail. *It should be noted that the yield does not meet my 4% minimum for initial investment. A younger investor could establish a position for capital appreciation.

  2. Norfolk Southern Corporation --Transportation Industry. Norfolk Southern Corporation, through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. The company transports coal products, such as coal, coke, and iron ore; automotive products, including finished vehicles and auto parts; chemicals products consisting of sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes, and municipal wastes; metals and construction products comprising steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks, and minerals; and paper, clay, and forest products, including lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, and clay. This Dividend Contender has 11 years of increasing dividends. The current yield is 2.6%*. The 5-year dividend growth rate is 19.5%, while last year's dividend growth rate was 18.6%. The current P/E is 13.13. The projected earnings per share growth rate for next year is 12.4%, while for the next 5-years it is 15.9%. Recently, NSC reported a 19% increase in 4th quarter profits. The company is fairly valued at the current price of $72.33. *It should be noted that the yield does not meet my 4% minimum for initial investment. A younger investor could establish a position for capital appreciation.

  3. CSX Corporation --Transportation Industry. CSX Corporation, together with its subsidiaries, provides rail-based transportation services. The company offers traditional rail service, and the transport of intermodal containers and trailers. It transports crushed stone, sand and gravel, metal, phosphate, fertilizer, food, consumer, agricultural, automotive, paper, and chemical products; and utility, industrial, and export coal to electricity-generating power plants, steel manufacturers, industrial plants, and deep-water port facilities. This Dividend Challenger has 7 years of increasing dividends. The current yield is 2.2%*. The 5-year dividend growth rate is 32.3%, while last year's dividend growth rate was 36.7%. The current P/E is 13.2. The projected earnings per share growth rate for next year is 14.2%, while for the next 5-years it is 14.7%. CSX is down slightly after reporting in-line earnings. The stock is fairly priced at the current price of$22.28. *It should be noted that the yield does not meet my 4% minimum for initial investment. A younger investor could establish a position for capital appreciation.

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF).

(Click charts to expand)

As can be seen from this chart, all three rail stocks performed better than SPY during the Great Recession and have risen from 50-60% since that time.

We will now look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:

Stock

Quarterly Dividend Rate

Number of Shares

Quarterly Income

CNI

$.34

133.81

$44.83

NSC

$.40

164.2

$65.68

CSX

$.09

139.1

$12.06

In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (February 2011-February 2012).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur Total Value
Totals 136.16 $176.85 2.35
CNI 12/07/11 $0.32 135.61 $43.26 $78.07 .55 $10,630.24
09/07/11 $0.33 134.99 $44.28 $71.80 .62 $9,736.71
06/07/11 $0.33 134.41 $44.49 $76.41 .58 $10,314.75
03/08/11 $0.34 133.81 $44.83 $74.73 .60 $10,044.45
Totals 168.17 $275.14 3.97
NSC 11/02/11 $0.43 167.19 $71.89 $72.92 .99 $12,263.18
08/03/11 $0.43 166.19 $71.46 $71.86 .99 $12,014.08
05/04/11 $0.40 165.28 $66.11 $72.31 .91 $12,017.40
02/02/11 $0.40 164.20 $65.68 $60.90 1.08 $10,065.46
Totals 423.18 $129.47 5.13
CSX 11/28/11 $0.12 420.74 $50.49 $20.68 2.44 $8,751.46
08/29/11 $0.12 418.44 $50.21 $21.80 2.30 $9,172.20
06/16/11 $0.00 418.44 3/1 split $24.30 $10,168.09
05/26/11 $0.12 139.27 $16.71 $77.24 .22 $10,773.75
02/24/11 $0.09 139.10 $12.06 $71.89 .17 $10,011.95

At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.

Stock

Q1

Q2

Q3

Q4

CNI

$44.83

$44.49

$44.28

$43.26

NSC

$65.68

$66.11

$71.46

$71.89

CSX

$12.06

$16.71

$50.21

$50.49

Totals

$122.57

$127.31

$165.95

$165.64

In addition, I will illustrate the total value of this portfolio by quarter in the following graph:

It can be seen from the table that the income from CNI fell slightly from quarter to quarter throughout the year. This was caused by the foreign exchange rate between the Canadian dollar and the US dollar. The total income for the year was $581.47. On an investment of $30k this was 1.94% yield. It can also be seen from the Total Portfolio chart that the ending portfolio value was $31,644.88. This computed out to a gain of $1,644.88 or 5.48%. Although there was a loss in CSX, NSC more than covered it. It should be noted that since the dividends were reinvested, they provide 35% of the total return.

If I were to choose only one of these railroads, it would be NSC, due to the substitution of natural gas for coal in the utility business. For the long run, I like all three stocks. My favorite railroad investment was profiled previously.

Conclusion: So far in 2012, the S&P 500 index is up 8.6% including dividends. In this election year, a strong economy and stock market will be a powerful motivator for voters. Since there has been a shift toward growth, transportation stocks including railroads should perform well. Year to date, CSX is up 2%, while NSC and CNI are down at present. Global trade will determine the railroads' fate this year and China's Vice President Xi Jinping has visited the United States making trade deals. It is critical that each investor does their own due diligence before making any investment.

Source: Ride The Rails To Retirement