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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Railroad stock steers toward bright future

Norfolk Southern stands to gain from the improving economy. (Associated Press)
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If you’re looking for a sturdy investment, consider Norfolk Southern (NYSE: NSC). The eastern U.S. railroad operator has averaged annual gains of about 12 percent for shareholders over the past 30 years, and its future is promising, too.

It recently disappointed investors by warning of near-term weakness due in part to slumping coal shipments tied to lower natural gas prices. But energy prices aren’t likely to remain depressed for too long, and coal remains a top ingredient for electricity generation.

In the meantime, Norfolk Southern is being nimble and staying ahead of the curve. The company hasn’t been shy about spending billions on new locomotives and cars in order to increase carload capacity, fill more orders and improve its operating efficiency through better fuel mileage. Its focus on intermodal and crude oil transport may pay substantial dividends over the long run, too.

And speaking of dividends, the company’s stock recently yielded 2.3 percent, and its dividend has been increased by an annual average of 12 percent over the past five years.

Our economy is slowly heating up, and that will mean more business for Norfolk Southern. Lower fuel prices are also helping reduce its costs. Sporting a forward-looking price-to-earnings (P/E) ratio near 14, below its five-year average of 15, Norfolk Southern is appealing. Perhaps look into other railroads, as well.

Ask the Fool

Q: When’s the best time for a beginning investor like me to buy my first shares of stocks? – L.M., Nine Mile Falls, Washington

A: Anytime – as long as you expect to remain invested for at least five or so years. If you wait on the sidelines, the market may keep rising, as it does in most years. If you wait for a pullback, the pullback may not be enough to have made it worth the wait. There’s one especially promising entry time, though: after the stock market has dropped sharply, leaving many stocks at bargain prices.

Don’t invest any money until you’re comfortable with what you’re doing. And if you’re still nervous about jumping in (perhaps because the market has risen a lot recently), consider easing in by buying shares over time.

If you’re a patient, long-term investor focusing on strong, growing companies that have sustainable competitive advantages and are trading at attractive prices, you should do well. Better still, start with a simple broad-market index fund while you learn more. For additional guidance, visit fool.com/how-to-invest.

Q: What’s negative amortization? – T.R., Dunlap, Indiana

A: Amortization happens when you lower a loan balance (such as that of a mortgage) over time by making payments toward it that cover interest charges and part of the principal. In unfortunate situations, though, your mortgage payment may not cover the interest due. When that happens, presto – you have negative amortization, featuring a growing, not shrinking, loan balance because the unpaid interest is added to your principal. Then you end up paying interest on interest!

Many foreclosures have been tied to adjustable-rate mortgages that featured minimum payment options. These permitted borrowers to end up with negative amortization.

My dumbest investment

Doh!

One of my dumbest investments was related to a product that my wife once bought me for Christmas – a cool little toy called an iPod. The iPod made such an impression on me (after years of using cassette tapes, any MP3 player could make an impression) that I bought 3,000 shares of Apple at about $18 each. After watching the shares bounce between $18 and $20 for a while, I got bored and sold at around $21 per share. Two stock splits later, you can see that I made a big mistake there. Doh! – R., online

The Fool responds: Doh! indeed. Had you hung on, you would have increased your investment more than 80-fold, making millions. In investing, impatience can be costly.

If you bought solely because you liked the iPod, that’s not enough on which to base a decision. But if you had come to respect management and Apple’s ability to innovate, and you liked measures such as the company’s profit margins and financial health, hanging on would have made sense. Perhaps look into the company again and see if it might merit a berth in your portfolio now.