Tag Archives: NYSE:UNP

Warning: Railroad Stocks Are Expensive. What Should Investors Do?

Railroad stocks have been really resilient in this economic downturn. Some are even making all-time highs! However, they are all expected to experience earnings cuts this year on a GAAP basis, which is not surprising given the far and wide impact the COVID-19 pandemic is having on the global economy.

Stock Price Chart on North American Railroad Stocks

Railroad stock data by YCharts. The 1-year price action of railroad stocks: CN Rail, CP, UNP, NSC, and CSX.

In other words, these railroad stocks are getting expensive. Some are fully valued. Others are slightly overvalued.

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How to Create a Passive Income Portfolio

To create a passive income portfolio, you can invest in bonds or stocks that generate interest or dividend income without you having to lift a finger. I prefer to invest in stocks which have outperformed bonds in the long run.

I also like the concept of investing in stocks because I’m owning stakes in businesses and benefiting from their profits (although I also take on their risks). This is markedly different from purchasing bonds for which you’re lending your money to governments or corporations for interests in return.

In fact, dividend investing is my favorite way to generate passive income. There are so many safe dividend stocks to choose from. Even in a booming stock market like today, you can still find quality businesses at good valuations.

Here’s how to create a passive dividend income portfolio:

  • Buy stocks that offer safe dividends at good valuations
  • Diversify but don’t di-worsify
  • Aim for a low-maintenance portfolio that’s replicable, scalable, and can be largely automated
grow a money tree

Buy stocks that offer safe dividends

The U.S. and Canadian stock markets offer yields of 1.8% and 2.8%, respectively. There are plenty of safe dividend stocks that offer higher yields of about 3-6%.

However, typically, the higher the yield of a stock, the slower its dividend growth will be. (Sometimes, high yielders don’t increase their dividends.) Similarly, low yield stocks tend to increase their dividends faster. Typically, dividend growth stocks are safer and better than stocks that simply maintain their dividends.

Buy stocks at good valuations to protect your invested capital and maximize your gains.

Here are a few examples.

A high yield example

NorthWest Healthcare Properties REIT (TSX:NWH.UN) owns a high quality portfolio of medical office buildings and hospital properties in major markets in Canada, Brazil, Germany, The Netherlands, Australia, and New Zealand.

The healthcare REIT generates stable cash flows from having a high occupancy of about 96% and a weighted average lease expiry of 13 years. Additionally, it gets organic growth from having more than 70% of its net operating income indexed to inflation. It also has CAD$370 million projects in its development pipeline that’ll also add to growth.

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Should You Buy These Industrial Dividend Stocks?

Some Industrial dividend stocks have dipped 25-30% from their 52-week highs. I believe they give a sense that the sector isn’t doing well, but is there value to be found? The dividend stocks covered are Union Pacific Corporation (NYSE:UNP), W W Grainger Inc (NYSE:GWW), and one more.

Three companies is a small subset to draw a conclusion from, but I believe they can be telling. To look at a more representative group, check out the Industrial Select Sector SPDR® Fund (NYSEARCA:XLI) that consists of 66 Industrials.

The Industrial Dividend Stocks

Union Pacific train

These Industrial dividend stocks have tumbled in the double-digits in the past year. They have solid balance sheets with S&P credit ratings of A or better.

  • At $49, Emerson Electric Co. (NYSE:EMR) has retreated 25% from its 52-week high of $65.
  • Around $85, Union Pacific is 31% below its 52-week high of $124.
  • At $193, W W Grainger Inc is down 26% from its 52-week high of $261.
Ticker Industry 1Yield 2S&P Credit Rating 3DG Streak (Years) 2Debt/Cap
EMR Diversified Industrials 3.9% A 58 28%
UNP Railroads 2.6% A 9 37%
GWW Industrial Distribution 2.4% AA- 44 34%

Data from close of November 17, 2015.

  1. Estimations from Google Finance
  2. From F.A.S.T. Graphs
  3. From CCC List found here

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