At the core of every well-diversified portfolio is the need for one or more defensive stocks. Many investors turn to utilities and telecoms to fulfill that need, but there’s another option to consider: railroads such as Canadian National Railway (TSX:CNR). In fact, buying Canadian National Railway makes perfect sense right now.
Here’s a look at why you should consider buying Canadian National.
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First, let’s debunk the stereotype
Canadian National and its peers are often viewed as boring investments that lack any growth. Additionally, that stereotype also views railroads as dated, lower-tech options from the last century.
While railroads have been around for over a century, they are neither dated nor lower-tech options.
In fact, CN has invested a significant amount over the years to invest in upgrading the technology around its signaling and scheduling, allowing the railroad to haul more freight quicker.
And CN hauls a lot of freight. The railroad hauls approximately $250 billion worth of goods and materials each year. That freight can be anything from automotive components, chemicals, and raw materials to wheat, finished goods, and crude oil.
That freight is hauled along one the largest railroad networks in Canada and among the largest on the continent. In case you’re wondering, CN’s rail network measures over 40,000 km in size and is the only rail network in North America that has access to three separate coasts.
The defensive appeal of CN is off the charts
The sheer level of reach and the economic activity its responsible for makes CN among the most defensive investments to consider buying.
But that’s not even the best part.
Much of that rail network traverses communities and cities across the continent. In fact, many of those communities and cities were built around the tracks themselves. This makes it a nearly impossible feat for any would-be competitor to emerge and attempt to build a competing network.
Additionally, the appetite for mergers and acquisitions of between larger Class I railroads such as CN and its peers has been in decline since the 90s. Specifically, only a single merger has transpired among major railroad operators was approved in well over two decades.
Again, this speaks volumes of the defensive appeal of a railroad, and may be reason enough to for some to consider buying Canadian National Railway
What about income?
Another key reason why investors may want to consider buying Canadian National Railway is for the dividend it offers.
As of the time of writing, CN’s dividend works out to a respectable 1.88%. That may not sound too appealing, at least initially, to some income-seeking investors.
Fortunately, there’s more to consider. First, we have dividend growth. CN has provided annual bumps to that quarterly dividend without fail for over two decades. Factoring in that dividend growth shows the return to be well into the double digits.
In other words, CN is a superb long-term option to buy now and forget about for a decade or more.
Buying Canadian National Railway makes sense
Every stock carries some risk, including Canadian National. Fortunately, Canadian National provides significant defensive appeal, strong growth potential and a tasty dividend to keep long-term investors satisfied.
In my opinion, not only does buying Canadian National Railway make sense, but the railroad should be a core holding as part of any well-diversified portfolio.
