Retire in Peace With These 2 Railroad Stocks

Railroads have beaten the market for more than a decade. Will Canadian Pacific Railway Ltd (TSX:CP)(NYSE:CP) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI) outperform again?

| More on:

Railroad stocks have been perfect retirement investments for decades. There’s good reason for this. Railroads are as close as it gets to a monopoly. Often, they’re the cheapest transportation option, especially across long stretches of land. In addition, there’s very little competition. If a railroad owns a certain route, your only option is to pay up or walk.

Because of their monopoly-like characteristics, railroad stocks have performed incredibly well for nearly a century. Over the last 20 years, for example, shares of Canadian Pacific Railway (TSX:CP)(NYSE:CP) and Canadian National Railway (TSX:CNR)(NYSE:CNI) have returned between 1,000% and 2,000%. They’ve also shined during economic downturns. During the 2008 financial crisis, both Canadian Pacific and Canadian National outperformed the overall market. And did I mention both stocks have paid a steadily growing dividend for nearly two decades?

When it comes to retirement stocks, Canadian Pacific and Canadian National are ideal picks.

Monopoly businesses

According to Fool contributor Prosper Bakiny, Canadian Pacific and Canadian National are ideal stocks to own during a recession. “Billions worth of goods are transported every year — mostly by major business — and doing so by way of railroads is one of the best options available,” Bakiny explains. “Trains arguably provide the best combination of cost efficiency, speed, reliability, and the ability to transport a significant amount of goods.”

Even during the worst economic downturns, railroads are largely insulated from headwinds. After all, when cost cutting is front and centre, transitioning to rail transport is at the top of many customer’s lists. Over the last 15 years, both Canadian Pacific and Canadian National have never posted an annual loss. For example, 2012 was Canadian Pacific’s worst year in decades, yet it still generated profit margins of 8.5%. Now that’s a durable business model.

Take the pain

A recession is just around the corner, or at least that’s the conclusion of a recent survey by Bank of America. The survey asked 235 fund managers how likely a recession is over the next 12 months. The results suggest that the risk of recession is at its highest level since 2009. According to one railroad executive, these recession fears have evidence behind them.

In August, railroad operator CSX posted weaker-than-expected results, forcing it to slash full-year guidance. According to CSX CEO James Foote, today’s economic backdrop is “one of the most puzzling I have experienced in my career.” CSX stock dropped 10% in response to the troubling update. If pressure hits the rest of the industry, prepare to load up.

Railroad stocks have been winning investments for decades because they offer permanent competitive advantages. Their economic moats are unparalleled, and their structural cost advantages continue to strengthen. There will be cyclical pain, just as there is in any other industry, but long term, railroads will prevail. If there’s short-term weakness in the stock price of Canadian Pacific or Canadian National, strongly consider using it to your long-term advantage.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Fool contributor Ryan Vanzo has no position in any stocks mentioned. Canadian National Railway is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Building a $50,000 Portfolio That Can Weather Any Market Storm

This defensive investment portfolio uses three ETFs to ride out any recession.

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

Top 3 TSX30 Winners: Understanding the Recent Stock Drop

Three TSX30 winners in 2024 have experienced price drops this year and continues to underperform due to massive headwinds.

Read more »

space ship model takes off
Dividend Stocks

Where to Put $12,000 in Today’s Market for Potential Long-Term Gains

There's no shortage of great investments that can provide potential long-term gains. Here's a look at three stellar options.

Read more »

Canadian dollars are printed
Dividend Stocks

How to Use $10,000 to Transform a TFSA Into a Cash Machine

Do you want growth and income? Consider these top investments that offer up monthly income in spades!

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

Building a $28,000 TFSA Portfolio One Contribution at a Time

Let’s take a look at how you can turn a $28,000 investment in a TFSA into a life-changing fund for…

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Making Your $25,000 TFSA Investment Work Harder for the Long Term

This strategy reduces risk while still providing a solid return.

Read more »

Asset Management
Dividend Stocks

TFSA: 3 Canadian Stocks to Buy and Hold for a Lifetime

Want to build wealth in your TFSA? Then these three Canadian stocks are some of the best options out there.

Read more »

Canadian Dollars bills
Dividend Stocks

Invest $20,000 in a TSX Stock, Create $1,278.98 in Passive Income

Are you worried about the future? Then consider a reliable dividend stock like this top choice.

Read more »