How September’s Market History Might Impact Investors

8 Industrial Stocks with Secure and Growing Dividends

Among the 11 sectors of the S&P 500, industrial stocks rarely stand out for their yields. Those honors usually go to the likes of energy, real estate, and utility stocks.
But industrial companies do boast the longest list of dividend-paying stocks in the index—a distinction that leaves investors with plenty of choices. As of July 31, 67 industrial stocks in the S&P 500 offered a dividend, just ahead of financials, according to S&P Dow Jones Indices.

And the sector does have some companies with attractive and secure yields, even as industrials have contended with some economic sluggishness.
The sector “is well positioned for income, as many [companies] are well-established businesses with strong cash flows,” says Chris Senyek, chief investment strategist at Wolfe Research, adding that he expects industrials to benefit over time from rate cuts by the Fed and other central banks. Those cuts would lower borrowing costs and allow for higher dividend growth, he says.

The yields of many of these companies, however, aren’t always that compelling.
Industrial issues had an average yield of 1.6%, in line with the S&P 500’s average for dividend-paying stocks as of July 31. (For the entire index, including the companies that don’t pay a dividend, the average yield is around 1.35%).

“You’re not getting a huge yield, but that’s not necessarily a bad thing,” says Mark Freeman, chief investment officer at Socorro Asset Management.

Jason Adams, portfolio manager of the T. Rowe Price Global Industrials Fund, says that stocks in the sector often fall into the dividend growth category, meaning the payouts rise steadily over time. A number of industrial companies consistently raise their dividends every year, a big plus for long-term investors.

This year, industrials clearly have been overshadowed by tech shares. Industrials in the S&P 500 have gained about 12% this year, trailing the broader market’s 18% result.

The sector also has had some unusual issues. “There’s been a pretty elongated industrials downturn, relative to other industrials downturns,” Adams says, citing low rail freight volumes as an example. “Industrials are somewhat beat up relative to other sectors” in terms of fundamentals.

But it’s not all gloomy. Adams points out that industrials are benefiting from electrification, automation, and infrastructure. The stocks he likes include Honeywell International, which yields 2.2% “and has the philosophy of trying to grow the dividend in line with earnings.”

Industrial issues had an average yield of 1.6%, in line with the S&P 500’s average for dividend-paying stocks as of July 31. (For the entire index, including the companies that don’t pay a dividend, the average yield is around 1.35%).

“You’re not getting a huge yield, but that’s not necessarily a bad thing,” says Mark Freeman, chief investment officer at Socorro Asset Management.

Jason Adams, portfolio manager of the T. Rowe Price Global Industrials Fund, says that stocks in the sector often fall into the dividend growth category, meaning the payouts rise steadily over time. A number of industrial companies consistently raise their dividends every year, a big plus for long-term investors.

This year, industrials clearly have been overshadowed by tech shares. Industrials in the S&P 500 have gained about 12% this year, trailing the broader market’s 18% result.

The sector also has had some unusual issues. “There’s been a pretty elongated industrials downturn, relative to other industrials downturns,” Adams says, citing low rail freight volumes as an example. “Industrials are somewhat beat up relative to other sectors” in terms of fundamentals.

But it’s not all gloomy. Adams points out that industrials are benefiting from electrification, automation, and infrastructure. The stocks he likes include Honeywell International, which yields 2.2% “and has the philosophy of trying to grow the dividend in line with earnings.”

Hickey provided Barron’s with a list of industrial stocks in the Aristocrats index that have yields above 1.3%, roughly the broad market’s yield, and payout ratios below 60%. The latter ratio measures the percentage of a company’s earnings that gets paid out in dividends. The lower the ratio, the better, because it shows that a company has more flexibility and room to increase its disbursement.

“The relatively low current payout ratios suggest that the dividend is safe,” Hickey adds.

Industrials in the S&P 500 have a middling payout ratio. For the four quarters ended March 30, it averages in the lower 40% range, according to S&P Dow Jones Indices. That’s well above laggards such as communication services and information technology, at around 17% and 25%, respectively. But industrials lagged behind utilities, which are well known for paying out a big chunk of their earnings, at around 65%. Consumer staples have a similar payout level.

The stocks that made the cut on Hickey’s screen include freight and logistics firm C.H. Robinson Worldwide, which yields 2.5%; manufacturer Illinois Tool Works, 2.5%, and industrial automation provider Emerson Electric, 2%.

Other Dividend Aristocrats in the industrial sector include construction and farm machinery equipment maker Caterpillar and A.O. Smith, both at around 1.6%. A.O. Smith’s portfolio includes building products such as water heaters, boilers, and tanks.

The Aristocrats aren’t the only place to look for industrial stocks that pay reasonable yields that are growing.

Shares of Cummins, which makes truck engines and other auto components, yield 2.4%. The stock has returned 27% this year.

Last month, the company announced an 8% dividend increase to its quarterly payout to $1.82 a share, marking the 15th straight year it has raised the payout. The company has said that its capital-allocation priorities are to invest for growth, pay down debt, and increase the dividend.

It’s another example of how the industrials sector can steadily reward income investors.

I would take a cautious approach moving forward from here.

DATA: Barron’s print edition page 23 8/26/24 Market Week Avi Saltzman

Paragraph: one Barron’s print edition page 9 This Week Barron’s

Paragraph: two, three & four Barron’s print edition page 23 Enjoy the Rest of August. Sept. is Coming. Avi Salzman

Paragraph: five NYT print edition 8/24/24 page B2 Stocks and Bonds The AP

Barron’s print edition 8/26/24 page 14 What Harris Political Miracle Could Mean Matt Pererson

Paragraph: Barron’s print edition 8/26/24 page 21 8 Industrial Stocks with Secure and growing Dividends Lawrence C. Strauss

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