With our dividend portfolio, we wanted to add a railroad company to the list. The large railroads have large built in moats around their business. You cannot ship railroads overseas. A lot of the railroad tracks do not overlap. Their biggest competitor is semi-trucks, and while semi-trucks are a lot more flexible in their destinations, railroads are a lot cheaper to transport goods by. Let’s get a Choo-Choo Dividend.
Picking a Company and Valuation
While buying the Union Pacific (UNP) would have been a much better at before at $70.00 per share, because it is now trading for about $87, which is 24% higher. We like getting the best possible deal we can. But considering how many stocks were on sale, we couldn’t buy everything we wanted at the lows. And we did not know at the time that would be the recent low. However, it is still a much better price than $120 a share it was trading for back in February 2015, which is still 28% cheaper than that high point. We wanted to get our purchase in before it got even higher, with the large jump up from $81 to $89 that happened about 1 weeks ago. It could symbolize the end of low prices for railroads. Even if it isn’t, we can buy more at a lower price. Union Pacific (UNP) has a good valuation of a PE of 16.
Union Pacific (UNP) runs railroads in the US. They transport agricultural products, automotive products, chemicals, construction products, minerals, consumer goods, lumber, metals, and paper. They have over 32,000 miles linking 23 states, ports on the Gulf Coast and Pacific Coast, and Canada to Mexico. That is a lot of railroads to connect their 10,000 customers. The company was founded in 1862 and they are currently headquartered in Omaha, Nebraska.
Being that railroads are very expensive to build, we do not see anyone building train tracks right next to Union Pacific (UNP). Even though commodities are weak currently, that will not last forever. One of the large commodities that probably cannot be counted on is coal, but Union Pacific (UNP) should be able to recover. Our power grid is going to continue to move away from coal, there will be some base level that will be used for a while. And there are many goods that need to be shipped, such as cars and farm goods.
Over the last 10 years, the dividend has gone from $0.30 a year to $2.20 a year. This is an increase of 733% in ten years. Assuming this happens again, our dividend will go from $2.20 today to $16.13 in 2026. This will take our YOC (yield on cost) from 2.5% to 19%. That would be awesome. While coal has a big impact today, great companies with great moat are able to recover. Also, they look like they just became a dividend contender in February 2016. A dividend contender is a company that paid an increasing dividend without missing for 10 years. This is great news, because they will be added to the list of a lot of people who buy dividend contenders or better.
What I bought
We bought 3 shares for $267.81 including those loco commissions. This will increase our yearly dividends by $6.60. I can use that to buy a few toy trains at the store. I wonder if toy trains are shipped by trains?
Disclosure: UNP – We own shares.