A very brief investigation of the records of railroad stock will show that it is a very precarious form of investment. It is unfortunately true that but very few roads which are old enough to have a history have escaped a receivership, or at least a period in which no dividends were paid. Many stockholders have considered themselves lucky that their stock has not been altogether wiped out by a foreclosure sale. On the other hand, the returns on the stocks of some roads have been phenomenally large. Frequently a road will commence business by calling for a payment of 10% on its stock. As the demand for money increases and the credit of the enterprise diminishes by the issue of bonds until no more bonds will be taken up, the stockholders will be called on for larger payments on their stock-subscriptions. In many cases where the road is successful from the start and its prospects have been so great that a large proportion, if not all, of the cost of construction and initial operation have been obtained from the proceeds of the sale of bonds, the stockholders begin to earn dividends when they have only paid 10 or 20% of their stock. In the improbable case that the road is able to maintain such a record, a regular dividend of '6% on the par value would mean virtually a dividend of 60% (or 30%) on the amount actually paid in. But in spite of the very favorable showings made on some roads, the statistics show that a large proportion of railroad stock actually pays no dividends. During the depression following the panic year of 1893, there was a period of three years in which 70% of all the railroad stock of the country paid no dividends whatever. It is useless to minimize this statement by saying that much of railroad stock has been "watered." If a road pays no dividends, the original bona-fide payments for stock, as well as the "water " in the stock, get no return on the investment, and for that period of three years 70% of railroad stock paid no dividends. The 30% which succeeded in paying dividends only paid them at an average rate of about 5.6%. Since that time the situation has grown far better. The percentage of stock which pays no dividends has been reduced to about 35%, and yet the last few years have been the most prosperous years known in railroad history. There is some mitigation of the above gloomy view when we consider that a large proportion, if not the total, of the stock of many small branch railroads is owned by the larger trunk lines, with which they connect, in their corporate capacity. The larger railroads utilize these smaller roads as feeders which add to the earnings of the main line. Even though the earnings directly assignable to the branch line are not sufficient to earn more than enough to pay the operating expenses and the interest on the bonds, the larger railroad company as owner is securing a return on its investment, in the indirect form of through-business furnished to its main line, which adds to the receipts of the main line far more than the added business costs. The fact that about 30% of all railroad stocks outstanding are owned by railways in their corporate capacity, and that some of it brings an indirect, if not direct, return, materially modifies the above statement regarding stocks which do not pay dividends.

Fig. 5. Percentage of stocks paying no dividends; also average rate paid by dividend-paying stacks.

* If we analyze the situation with respect to different sections of the country, we find a very marked difference. Group VII, comprising the region between the Rocky Mountains and the Missouri River, has the best record regarding roads which failed to declare dividends, less than 8.5%. having failed to do so. Over 40% of the stock in that group paid from 7 to 8 per cent. The largest amount of stock belongs to Group II; in this group a large percentage paid from 4 to 8 per cent. The Pacific States, Group X, are erratic, over 80% paying no dividends while 1 3/4% paid over 10%.

15. Interest On Bonds

The record of the payment of interest on bonds is of necessity far better than that of paying dividends on stock. Excluding equipment trust obligations from consideration, less than 4«% of the bonds defaulted their interest. Although the very large bulk of bonds pay from 3 to 6% interest, there is a considerable percentage which pays 7 or 8% and even a little over. Considering the railroads of the United States as one system (and thus eliminating the intercorporate payments made to a railroad which owns the bonds of another road), the net interest on the funded debt for 1903 and 1904 required a little over 14% of the gross earnings from operation. Even this figure is a considerable reduction from the corresponding figures for previous years, owing largely to the general policy of refunding railroad securities at a lower rate of interest. Although there is a very large variation in individual cases of the proportion of gross earnings which must be paid out for interest on the funded debt, it is remarkable that such a large percentage of all railroads expend nearly the same proportion of their gross earnings in this way. This uniformity seems to be regardless of the length of the road, except that, the larger the system, the greater the probability that the average figure will be approached. The largest variations from average figures occur with very small branch lines which are operated under special operating conditions and financial agreements.

* The figures in this and the following paragraphs were taken from the I. C. C. report for the year ending June 30, 1904.