Freight revenues account for the bulk of the top line for stocks in the Zacks Transportation-Rail industry. However, with volatility ruling the roost as far as the U.S economy is concerned, freight revenues have been moving south of late.
The Cass Freight Shipments Index declined 1.7% month over month in July. What is more concerning is that the measure has decreased in four (January, April, June and July) of the seven months reported so far this year. High inflation apart, supply-chain woes, inducing labor and equipment shortages, are hurting railroad volumes.
Due to the above-mentioned headwinds, the railroad industry has underperformed the S&P 500 Index over the past six months. The stocks in this industry have collectively lost 9.3%, while the Zacks S&P 500 composite has declined 7.5%.
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Now the question is, does the presence of these headwinds imply that stocks from this industry should be ignored by investors? The answer is a categorical no. We believe that dividend-paying railroad stocks like Union Pacific Corporation UNP and Norfolk Southern Corporation NSC should be on investors’ watch list despite the downtrends.
Investors are always on the lookout for dividend stocks as these provide a steady source of income and a cushion against market uncertainty, as is the current scenario. Dividend stocks not only provide a solid income stream but also have fewer chances of experiencing wild price swings.
Dividend stocks are safe bets for creating wealth, as the payouts generally act as a hedge against economic uncertainty. In view of the tailwinds mentioned, it can be safely said that dividend-paying stocks appear as a preferred option compared to non-dividend-paying stocks in periods of high degree of market volatility as the present situation.
We zeroed in on the above-mentioned railroad dividend-paying stocks by running the Zacks Stocks Screener. Our choices have a dividend yield in excess of 2% and a dividend payout ratio of less than 50%. Also, both stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
Union Pacific is based in Omaha, NE, and has a market capitalization of $142.87 billion, currently. UNP’s strong free cash flow-generating ability pleases us. It supports UNP’s shareholder-friendly activities. Cash from operations in 2021 came in at $9 billion, up 6% year over year. Free cash flow increased 8.8% to $3,523 million in 2021. Cash flow conversion rate was a healthy 73% in the first half of 2022. However, supply-chain woes are bothersome.
The stock has a dividend yield of 2.26% and five-year annualized dividend growth of 13.65%. UNP's payout ratio is 48% of its earnings at present. Check Union Pacific’s dividend history here.
Union Pacific Corporation Dividend Yield (TTM)
Union Pacific Corporation dividend-yield-ttm | Union Pacific Corporation Quote
Norfolk Southern is based in Atlanta, GA, and currentlyhas a market capitalization of $57.13 billion. NSC’s strong free cash flow generating ability supports its shareholder-friendly activities. In 2021, NSC generated a free cash flow of $2,785 million, up 30% year over year. In first-half 2022, free cash flow was $1,174 million. NSC expects current-year dividends in the 35-40% range of its net income. Management expects to utilize the remaining cash flow and financial leverage to repurchase shares.
The stock has a dividend yield of 2.02% and a five-year annualized dividend growth of 13.63%. NSC's payout ratio is 39% of its earnings at present. Check Norfolk Southern’s dividend history here.
Norfolk Southern Corporation Dividend Yield (TTM)
Norfolk Southern Corporation dividend-yield-ttm | Norfolk Southern Corporation Quote
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