The prolonged impact of high interest rates and inflation impacts all companies in different ways. Not only does it lead to volatility, but it also offers a rare opportunity for long-term investors. This is especially true for some niche segments of the market, such as railway and telecom stocks.
That opportunity allows prospective investors to purchase otherwise stellar investments at highly discounted prices.
For investors willing to look past short-term volatility, these railway and telecom stocks offer long-term value that the market is currently overlooking.
Here’s a look at the railway and telecom stocks that offer that opportunity right now.
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Canadian National Railway: The undervalued railway stock
Canadian National Railway (TSX: CNR) is the railway stock for investors to consider right now. CN is one of the largest railways on the continent, connecting warehouses, factories, and ports on three coastlines to major metro markets. This makes the railway one of the most defensive options on the market, and for good reason.
CN hauls nearly $250 billion worth of goods across its network each year. Those goods can be anything from automotive parts, chemicals and crude oil to precious metals, raw materials, and wheat. CN’s loads are highly diversified and extremely necessary to the overall continental economy.
That defensive moat is solid. To even consider a competitor emerging to counter CN’s massive network would take decades of construction and tens of billions of dollars.
Despite that appeal, investors have shifted away from the railway stock to higher-growth sectors.
This sets prospective investors up well to capitalize on what CN can offer. Apart from those high barriers to entry, CN offers strong pricing power and long-term contract stability.
Additionally, the railway stock offers a compelling quarterly dividend that offers strong dividend growth supported by disciplined capital allocation and cash flow. As of the time of writing, CN offers a yield of 2.50%. The company has also amassed three decades of consecutive annual increases to that dividend. Over the trailing 12 months, the stock had traded flat, hence the current opportunity.
Sometimes a boring investment is what long-term investors need.
BCE: The telecom stock investors have written off
The other area for investors to look closely at right now is telecom stocks. BCE (TSX: BCE) has faced a different form of negativity. Following a series of cost-cutting measures that culminated in BCE slashing its dividend, investors have fled the stock in recent years.
Those cost-cutting measures were in response to higher interest rates that put pressure on the telecom’s balance sheet. Those cost-cutting efforts included divesting non-core assets and focusing on its core operations.
Unfortunately, as the stock price plummeted, BCE’s yield soared, hitting 12% at one point. That led to the painful, yet necessary, dividend cut. As of the time of writing, the dividend offers a more sustainable 5% yield.
This lower payout ratio lets BCE manage its debt more effectively while continuing to invest in its network. In short, BCE is no longer priced for perfection, and long-term investors may be overlooking the company’s improved financial footing and potential.
Why these railway and telecom stocks still matter
Both CN and BCE operate in sectors that form the backbone of the Canadian economy. Railways and telecoms are essential infrastructure, and both companies generate recurring cash flow from services that people and businesses rely on every day.
More importantly, both stocks stand to benefit as interest rates continue to ease. Together, they offer a blend of stability, income, and long-term compounding that many investors underestimate.
Short-term sentiment may be negative, but the long-term case for both companies remains intact. CN and BCE are being written off for reasons that do not reflect their long-term value. For long-term investors, dismissing these stocks now may be premature.
In my opinion, a small position in one or both of these stocks would be a great addition to any larger, well-diversified portfolio.
