Recession: Should I Buy Canadian Railway Stocks?

Railway companies like Canadian National Railway (TSX:CNR)(NYSE:CNI) have been excellent capital and dividend appreciation stocks for years. With the potential for a prolonged recession ahead, is it still the time to buy?

| More on:
Freight Train

Image source: Getty Images

I love to buy Canadian railway stocks. I have personally owned Canadian National Railway (TSX:CNR)(NYSE:CNI) for a while, and Canadian Pacific Railway (TSX:CP)(NYSE:CP) is also a good stock. I think you can’t really go wrong with either of them. These companies are stable dividend growers operating as an oligopoly.

The infrastructure the railways provide is invaluable to our nations. Railway lines are limited, and no one is making any more of them at the moment. They have been wealth creators for generations.

Does this mean that they will be strong investments going forward? Considering the crisis in the energy market, the global shutdown, and the possibility of a prolonged recession, should you buy Canadian railway stocks today?

Rails are fantastic

I have to start off by saying that every Canadian investor should own railways in their dividend portfolios. Even though capital appreciation has stalled somewhat, the stocks have been excellent performers over the long run. They offer their services to a wide variety of businesses and operate in multiple geographies.

Of course, their businesses will be impacted in the short term by the pandemic. It is interesting to note, though, that even in the midst of all these issues, CNR was able to move a record amount of grain in April.

They have great dividends

Both of these companies have excellent dividends. They are not massive dividends when looking at the yield. After all, CNR only pays a yield of about 2% and CP has only half that at 1%. These dividends are not going to bring in much more income than a GIC, considering the extra risk of owning equity.

The reason these yields are great is due to their growth. CNR just increased its dividend by 7% in January this year. CP raised its dividend by 27.5% a year ago. It will be interesting to see if they raise the dividend again this year as well. The quickly growing yield combined with capital gains makes for a winning combination.

Both companies have very low payout ratios, leaving room for dividend stability and further increases. CNR currently has a payout ratio of about 30% of earnings and CP’s is even lower at under 20% of earnings.

Should I buy them today?

Well, the vague answer is yes and no. If you already have a decent holding in railway stocks, I would probably not buy any more shares at the moment. These stocks are cyclical, meaning that there could be a lot more pain to come in their share prices if the economic situation begins to look worse than it already is. If the share price begins to come off substantially, that would be the time to buy. 

If you do not own any shares, however, you could open a position today. These are great long-term investments with decades of dividend payments and growth. Their payouts are about as safe as you can get in Canada, and the businesses will be secure for decades.

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.

Fool contributor Kris Knutson owns shares of Canadian National Railway and CANADIAN PACIFIC RAILWAY LIMITED. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Canadian National Railway.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »