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Investment Opportunities

6 Best Railroad Stocks to Buy

Since the early days of the United States, railroads have played a critical role in helping the economy grow. The U.S. is one of the world’s largest countries by land area and railroads are crucial in transporting goods from one sea to the other (shining) sea. Already, investors have made billions by buying the best railroad stocks.

Today, there are about 140,000 miles of tracks laid on U.S. soil. The U.S. freight system is also generally considered the largest, safest and most cost-efficient in the world.

Even though airplanes can transport goods much more quickly, railroads remain a staple of transportation. In fact, with recent discussion around projects like the high-speed rail system, railroads are more popular than ever.

With this in mind, it’s no wonder that lots of investors are interested in finding the best railroad stocks to add to their portfolios.

Let’s take a look at how the railroad industry works and a few of the best railroad stocks to buy…

inspecting the best railroad stocks and cargo

NOTE: I’m not a financial advisor and am just offering my own research and commentary. Please do your own due diligence before making any investment decisions.

Pros of Buying Railroad Stocks

The railroad industry in the United States is definitely an interesting one. For starters, there has been a consolidation over the years. Today, there are only a handful of railway systems that dominate the country. The revenue of these railways also fluctuates with the economy.

If the economy is thriving and people are buying/selling more goods, then railroads will likely thrive. On the other hand, if the economy is struggling and consumer confidence is low, then railroads will likely struggle.

There are two main reasons why investors buy railroad stocks. First, they usually provide income by paying consistent dividends. Second, since there will always be a need to transport goods, railroads are considered a stable industry. So much so that one of the world’s most famous investors, Warren Buffett, snatched up 100% of the country’s biggest railroad in 2009. Buffet’s purchase of Union Pacific for $44 billion was his largest ever and serves as a testament to his faith in the U.S. rail system.

Before looking at specific railroad stocks, let’s take examine how America’s railway system has changed over the past few years. This will give us a good idea of which railroad stocks are a good buy.

America’s Railroad Transformation

America’s rail system used to operate using a hub-and-spoke model. Train cars would enter the main “hub” where they could then be sent off to any number of different destinations.

However, most railways have since transitioned to an operating model known as precision scheduled railroading (PSD). This new model was pioneered by Hunter Harrison and allows freight trains to operate more like passenger trains. This means that trains are dispatched on set, pre-determined schedules. That’s instead of having to wait for a sufficient number of loaded cars to become available.

This new PSR system has greatly improved railroad profitability. It’s allowed operators to get more use out of their assets.

Now, let’s look at a few of the biggest railroad stocks to consider buying.

Union Pacific (NYSE: UNP)

Union Pacific is one of the major railways that serve the western United States. In 2020, it posted total revenue of close to $20 billion and a net income of over $5 billion. Its dividend yield is around 2%, meaning that for each share of stock you own you can expect to receive about $4.28 in dividends annually.

Union Pacific is in the midst of transitioning to a PSR system, which could have a big positive impact on its stock over the long term if it’s successful. So far, it has already seen a 30% increase in locomotive productivity and a 21% reduction in car terminal dwell.

Its stock is up over 100% over the past five years. And as one top railroad stocks, it still has plenty of room to run.

CSX Corporation (Nasdaq: CSX)

CSX Corporation is a major railway that serves the eastern United States. Its network has over 20,000 miles of track and access to 70 ocean, river and lake port terminals. In 2020, it posted total revenue of over $10 billion and a net income just below $3 billion. Its dividend yield is currently just above 1%.

CSX has already implemented the PSR system which may be a reason why its return has outperformed that of Union Pacific. As far as future initiatives, it recently stated that it is committed to returning capital to shareholders.

As one of the best railroad stocks, it’s already up about 250% over the past five years.

Norfolk Southern (NYSE: NSC)

Norfolk Southern currently boasts 19,300 miles of track that run through every major container port in the eastern United States. It posted total 2020 revenue of $9.8 billion and a net income of $3.6 billion. Its dividend yield is currently above 1.5%.

In Q2 of 2021, it also posted several all-time records. These records include its highest quarterly income from railway operations ($1.2 billion) as well as its best railway operating ratio ever of 58%.

Its stock is up over 150% over the past five years and has more room to run.

Since there are only a handful of companies that operate railroads in the United States, I also thought it’d be interesting to look at railroad stocks that aren’t railroads at all.

Alternative Railroad Stocks to Buy

Here is a quick list of a few companies that participate in the railroad industry without actually operating the trains:

  • Caterpillar (NYSE: CAT) – Manufactures train cars, engines, tracks, fasteners, signaling and rail welding, as well as service/repair services
  • Trinity Industries (NYSE: TRN) – Offers a comprehensive platform of leasing, manufacturing, maintenance and professional services
  • GATX Corp (NYSE: GATX) – Leases locomotive and other types of industrial equipment.

I hope you’ve enjoyed my answer to the question, “what are the best railroad stocks to buy?” As usual, all investment decisions should be based on your own due diligence and risk tolerance. You might also want to consider two other vital industries to invest in. Check out these top agriculture stocks and water stocks.

If you’re looking for even more investing opportunities, sign up for Wealthy Retirement. It’s a free e-letter that’s packed with tips and tricks from investing experts.


About

A University of Miami grad, Teddy studied marketing and finance while also playing four years on the football team. He’s always had a passion for business and used his experience from a few personal projects to become one of the top-rated business writers on Fiverr.com. When he’s not hammering words onto paper, you can find him hammering notes on the piano or traveling to some place random.

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