How to Invest in Railroad Bonds

by Carmelo Montalbano ; Updated July 27, 2017
Calculate and compare railroad investments carefully.

Railroad bonds represent the highest quality bonds available among all transportation sector bonds and among the highest rated bonds as a group in the fixed-income market. Because there is no major railroad expansion today and because there are more cost-efficient debt issuance than bonds available to the industry, railroad bonds tend to trade higher in price because of relative scarcity.

Step 1

Find outstanding railroad bond issuance from online brokers such as Etrade or Optionxpress. Use the Resources links below for investigating possible sources of bond supply. Find stocks in the Standard and Poor's railroad sector. Examples include Burlington Northern and Wabtec, or use the links below for a complete listing.

Step 2

Buy railroad bonds by purpose or reason for the bond issue (rolling freight, warehouse construction, etc.) and then by quality of issuer. Credit differences are substantial among the types of railroad bonds. Railroad bonds may be issued for new moving freight cars, land, cash flow and recently property and land development projects. They may be subordinated to prior claims. Buy specific issues, mutual corporate bond funds or open end bond using the links below or by consulting your brokerage firm.

Step 3

Buy railroad bonds from companies that have large freight operations. Avoid issuance by companies raising money for land development. They probably aren't direct guarantees of the railroad company.

Step 4

Consider buying bonds issued by railroad holding companies. Buy bonds that are collateralized or backed by assets that are fungible or with long lives like a railroad car or track issuance. Because many railroads have adopted sale leaseback techniques for purchasing equipment, it is harder to find pure railroad backed bonds for corporate issuance. Consider buying bonds of the large railroad conglomerates such as Burlington Northern, CSX and Santa Fe.

Step 5

Be aware that finding railroad bonds issued for the construction of moving stock is difficult. This is because of the many financing techniques other than public bond issues in use in financing rolling stock today. They remain, however, a critical part of the infrastructure and should be a part of every taxable bond portfolio. Revenues will vary with the vagaries of the economy, but railroads remain a low-cost provider and hence the most attractive of all transportation bonds.

Step 6

Get market exposure in railroad bonds by buying any of the open-end corporate bond funds, exchange-traded funds that invest in corporate bonds or indexes that invest in bonds. Morningstar (see Resources) carries all these resources in its mutual fund resources.

Tips

  • Consider railroad bonds as a long-term asset for retirement and IRA accounts. While the bonds may be one of your lower-yielding assets, the credit quality is superb and the yield is better than Treasuries. Railroads continue to be the preferred choice for moving bulk materials cheaply.

    Examination of the railroad company's outstanding debt declared on its balance sheet will show the details of every specific debt the company has outstanding. Use this information to find issues matching your preferences.

Warnings

  • Check bond ratings carefully so as not to buy railroad debt subordinated by prior claims.

About the Author

After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.

Photo Credits

  • www.sxc.com/onir
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