Best Canadian Railway Stocks
Railways are among the highest-quality businesses on the TSX. They move a huge share of the goods that keep the economy running, over networks that are essentially impossible to replicate. This guide explains how to evaluate a Canadian railway stock and names the two dominant TSX operators, without publishing invented figures.
Why railways are exceptional businesses
A transcontinental rail network is one of the widest economic moats that exists. No one is going to lay thousands of kilometres of competing track, so the incumbents enjoy durable pricing power and high barriers to entry.
Railways haul bulk goods, grain, potash, coal, chemicals, intermodal containers, autos, at a cost per tonne that trucks cannot match over long distances. That entrenched role gives them steady, economy-wide demand.
In Canada the sector is effectively a duopoly of two large, widely known names: Canadian National Railway (CN) and Canadian Pacific Kansas City (CPKC). Both are core long-term holdings in many Canadian portfolios and blend modest dividends with steady capital growth.
Keep reading: How to Start Investing in Canada · Dividend Investing in Canada.
What to look for in a railway
Railways are judged largely on operating efficiency, since a small change in cost per shipment moves profits meaningfully.
- Operating ratio: operating expenses as a percentage of revenue. Lower is better; it is the headline efficiency metric for railroads.
- Volume trends: carloads and intermodal traffic, which reflect economic demand.
- Pricing power: the ability to raise rates ahead of inflation.
- Free cash flow: railways are capital-intensive but generate strong cash flow that funds dividends and share buybacks.
- Network reach: access to key ports, resource regions, and cross-border or US markets adds value.
Growth plus a growing dividend
Railways are a rare TSX combination of a reasonably defensive, high-quality business with both capital appreciation and a rising dividend. The yields are usually modest, but the dividend growth and share-price compounding over long periods have been strong.
CPKC's combination created a unique single-line network spanning Canada, the United States, and Mexico, an example of how scale and reach can add long-run value in this industry.
Because railways sit at the centre of the economy, they are a way to invest in broad economic activity rather than a single commodity or product.
Risks to weigh
Railways are cyclical. Volumes rise and fall with the economy, commodity demand, and trade, so a recession or a weak crop year can dent traffic and revenue.
They also face operational and regulatory risks: severe weather, derailments, safety oversight, and labour disruptions can all interrupt service and hurt results.
As high-quality businesses, railways rarely trade cheaply. Paying too high a price can cap your returns even when the underlying company performs well, so valuation still matters.
Owning railways in a Canadian portfolio
With only two major names, some investors simply own one or both directly. Eligible Canadian dividends qualify for the dividend tax credit in a taxable account, and both the modest income and the larger capital gains are sheltered inside a TFSA or RRSP.
Since the sector is a duopoly, a broad Canadian index or industrials ETF is another way to gain exposure alongside other quality names, spreading single-company risk for a low fee.
Railways pair well with the TSX's income sectors because they add a growth and quality dimension that banks, utilities, and pipelines do not, helping diversify a Canadian portfolio.
Frequently asked
Which railways can I buy on the TSX?
There are two major names: Canadian National Railway (CN) and Canadian Pacific Kansas City (CPKC). Together they form an effective duopoly that hauls a large share of Canadian freight, and both are widely held long-term stocks.
What is an operating ratio?
It is a railway's operating expenses as a percentage of its revenue, the headline efficiency metric for the industry. A lower operating ratio means the railway keeps more of each dollar of revenue as profit.
Are railways a defensive or cyclical investment?
Both, in a sense. Their wide moats and essential role make them high quality and relatively resilient, but volumes still rise and fall with the economy, commodities, and trade, so they carry cyclical risk.
Sources
General information for Canadian readers, not individualized financial, tax or investment advice. Figures reflect the date reviewed; confirm current limits and rules with the CRA or a qualified professional before acting.