7 Best Industrials Sector Dividend Stocks

These dividend growth stocks are my top-ranked Industrials sector picks. Three stocks are discounted and present good opportunities for dividend growth investors.
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In this article series, I present the top-ranked dividend growth stocks in each GICS sector. To rank stocks, I sort them in descending order by quality scores, as determined by DVK Quality Snapshots. When two stocks have the same quality score, I use tie-breaking metrics to rank one stock higher than the other.

My watch list for dividend growth stocks is Dividend Radar, a list of stocks trading on U.S. Exchanges with dividend increase streaks of five or more years. Dividend Radar is updated and published every Friday and is available for download here. The latest edition (dated August 20, 2021) contains 755 stocks, 118 of which are in the Industrials sector.

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Sector diversification is one way to mitigate portfolio risk, as some sectors perform better than others in different economic conditions.

Here are the previous articles in this series, in case you missed them:

The Industrials Sector

The Industrials Sector includes companies that manufacture and distribute capital goods, including aerospace and defense, building products, construction and engineering, electrical equipment, machinery, and diversified industrial conglomerates; companies that provide commercial and professional services, including printing, employment, environmental, and office services; and companies involved in transportation, including airlines, airfreight and logistics, marine, road and rail, and transportation infrastructure.

A detailed breakdown of the Industrials sector (source: Dividend.com)

A detailed breakdown of the Industrials sector (source: Dividend.com)

Sector and Performance Comparison

Let’s compare the sector averages and historical performance of the GICS sectors over different periods to see how the Industrials sector compares:

Sector averages of Dividend Radar stocks and the historical performance of sectors (data sources: Dividend Radar 21 August • Fidelity Research and Google Finance 20 August)

Sector averages of Dividend Radar stocks and the historical performance of sectors (data sources: Dividend Radar 21 August • Fidelity Research and Google Finance 20 August)

The table is color-coded to show each column’s highest (green) and lowest (red) values. The Industrials Sector has the lowest average yield of the eleven GICS sectors. Note that The Industrials Sector has the second-most dividend growth stocks in Dividend Radar, only trailing the Financials Sector.

Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:

Sector performance charts (created by the author with data from Fidelity Research, 20 August 2021)

Sector performance charts (created by the author with data from Fidelity Research, 20 August 2021)

The Industrials sector outperformed the S&P 500 over the trailing 1-year time frame but has underperformed the S&P 500 over all other time frames.

Quality Assessment

I use DVK Quality Snapshots to assess the quality of dividend growth stocks. The system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points. To rank stocks, I sort them by descending quality scores and break ties by using the following factors, in turn:

  • SSD Dividend Safety Scores
  • S&P Credit Ratings
  • Dividend Yield

I rate stocks by quality score as Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range of 15-25, while Speculative Grade ratings have quality scores below 15.

Top-Ranked Industrials Sector Stocks

Here are the seven top-ranked dividend growth stocks in the Industrials Sector:

Screen Shot 2021-08-23 at 1.18.59 PM

Note that I’m long the highlighted tickers in my DivGro portfolio.

1. Honeywell International Inc. (HON)

HON is a diversified technology and manufacturing company with worldwide operations. The company provides aerospace products, software, and services; control, sensing, and security technologies; materials, process technologies, and automation solutions; and productivity, workplace safety, and asset performance solutions. HON was incorporated in 1985 and is headquartered in Charlotte, North Carolina.

2. General Dynamics Corporation (GD)

Headquartered in Falls Church, Virginia, GD is an aerospace and defense company offering products and services in business aviation; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and information systems and technologies. Formed in 1952, GD has grown steadily through the acquisition of many businesses.

3. Union Pacific Corporation (UNP)

Omaha, Nebraska-based UNP operates the most extensive public railroad in North America, with 32,000 miles of track linking 23 states in the western two-thirds of the United States. UNP hauls coal, industrial products, intermodal containers, agricultural goods, chemicals, and automotive products. UNP owns a quarter of the Mexican railroad Ferromex. The company was founded in 1862.

4. Lockheed Martin Corporation (LMT)

Founded in 1909 and headquartered in Bethesda, Maryland, LMT is a global security and aerospace company engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems. LMT operates through four segments, Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space Systems.

5. Illinois Tool Works Inc. (ITW)

Founded in 1912 and headquartered in Glenview, Illinois, ITW is a diversified, global company that manufactures and sells industrial products and equipment worldwide. ITW operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.

6. Emerson Electric Co. (EMR)

EMR provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. The company is engaged in designing, manufacturing, and selling a broad range of electrical, electromechanical, and electronic products and systems. EMR was founded in 1890 and is headquartered in St. Louis, Missouri.

7. 3M Company (MMM)

MMM is a diversified technology company with worldwide operations. The company has leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial; safety, security and protection services; transportation; and other businesses. MMM was founded in 1902 and is headquartered in St. Paul, Minnesota.

Please note that these stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak (Years), the forward dividend Yield for a recent share Price, and the 5-year compound annual dividend growth rate (5-Yr DGR). The 5-year Yield on Cost (5-Yr YoC) and Chowder Number (CDN) are measures of a stock’s dividend income and future total return prospects, while the 5-year trailing total returns (5-Yr TTR) is a measure of the stock’s performance over the past five years.

I also provide the five quality indicators used in determining each stock's quality score (Qual), as well as my Fair Value estimate to help identify stocks that trade at favorable valuations. The discount/premium column (-Disc/+Prem) shows the discount or premium of a recent share price to my fair value estimates.

Screen Shot 2021-08-23 at 1.22.14 PM
Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using each stock’s 5-year average dividend yield using data from Portfolio Insight. Finally, with several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Commentary

The top-ranked Industrials Sector stocks are rated Excellent, but only three stocks are discounted and trade below my Buy Below prices: GD, LMT, and MMM. Also, although ITW is not available below my Buy Below price, I suggest putting the stock on your watchlist.

I own six of the seven top-ranked Industrials sector stocks, the exception being EMR. Unfortunately, EMR is overvalued, and I don’t care to buy stocks with poor total return and dividend income prospects (see the red-colored cells in the table).

I think LMT presents the best value at the moment. Discounted by 8% to my fair value estimate of $388, LMT offers a solid yield and a robust 5-year DGR of 9.6%. The stock’s 5-year yield on cost is 4.6%, the highest of the seven candidates.

For investors looking for total returns rather than dividend income, ITW has the highest 5-year DGRs and could perform well in the future should the company continue its generous dividend increases. ITW essentially matched LMT’s performance over the past ten years, topping the remaining Industrials Sectors stocks presented in this article.

Comparison of the total returns of the top-ranked Industrials sector stocks over the past ten years (source: Portfolio-Insight.com)

Comparison of the total returns of the top-ranked Industrials sector stocks over the past ten years (source: Portfolio-Insight.com)

I would suggest waiting for ITW to trade below $230 before investing, though.

LMT presents a compelling case, in my opinion:

LMT non-GAAP EPS and dividends paid (TTM), with stock price overlay

LMT non-GAAP EPS and dividends paid (TTM), with stock price overlay

LMT’s dividend growth is a model of consistency and, in recent years, non-GAAP earnings growth has outpaced both the stock price and dividend growth. According to Simply Safe Dividends, LMT’s earnings payout ratio of 40% is “low for most companies.”

Concluding Remarks

This article presented the seven top-ranked dividend growth stocks in the Industrials sector, all rated Excellent based on my rating system that maps from DVK Quality Snapshots quality scores. Three of the seven stocks are discounted and trade below my fair value estimates.

LMT and ITW appear to present the best opportunities for investors looking for strong dividend income and total returns, respectively. LMT is discounted and offers a good investment opportunity, but investors should wait for a better entry price before buying ITW.

Thanks for reading!

Next time, we’ll look at the best Information Technology sector stocks.

Thanks for reading!

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