Don’t Overlook This Sector With the Best Dividend Growth Stocks

Investors might not pay much attention to the industrial sector. After all, stodgy industrial stocks are hardly exciting. Industrial stocks do not receive much analyst coverage, nor will they be featured in the financial media any time soon.
However, dividend growth investors would be wise not to overlook the industrials. That’s because the industrial sector has a number of stocks that shine: they possess some of the longest histories of dividend growth in the entire market.
For example, Dover (NYSE: DOV), 3M (NYSE: MMM) and Illinois Tool Works (NYSE: ITW) have all increased their dividends for over 50 years in a row.

Economies Of Scale, High Profit Margins

All three stocks are industrial manufacturers, operating across various industries throughout the global economy. Dover has annual revenue of $7 billion. Its products include equipment, components, and specialty systems. It operates four segments, including engineered systems, fluids, energy, and refrigeration and food equipment.
Meanwhile, 3M has an operating history that stretches back to 1902, when it was known as the Minnesota Mining and Manufacturing Co. It has paid a dividend for 100 years since then. Today, 3M is a global manufacturing giant—it sells its products in 200 countries around the world and generates over $30 billion in annual revenue. 3M is a prime example of the benefits of global scale: the company consistently generates returns on invested capital above 20% each year.
Illinois Tool Works manufactures industrial products for the automotive, electronics, construction and food industries. In fact, 2016 was the most profitable year in the company’s history. Earnings increased 11% last year, and are up 19% through the first three quarters of 2017.
Industrials with exposure to energy have struggled a bit in recent years. For example, Dover’s revenue fell 5% last year, along with a 13% decline in earnings, as the impact of falling commodity prices took its toll.
Lower oil and gas prices caused energy sector customers to lower capital spending on new equipment. This negatively affected industrials last year. Fortunately, these industrial companies are diversified and are generating enough growth in other industries to offset weakness in oil and gas. This will keep their dividends growing for years to come.

Potential For Continued Dividend Growth

While 2016 was difficult for the industrial majors, 2017 has turned out to be a much better year. Dover’s revenue increased 16% through the first three quarters of 2017. Earnings are up nearly 50% in that time. Dover expects continued growth, thanks in large part to higher commodity prices. More oil and gas rigs are being placed back into service, which led to 14% growth in bookings last quarter. Dover expects 15% revenue growth and 30% earnings growth for 2017.
Like Dover, 3M is also exposed to the energy industry. Difficulties from oil and gas product sales kept 3M’s revenue flat last year, but growth has picked up this year. The company expects at least 10% earnings growth in 2017. The emerging markets are going to play a big role in 3M’s growth. For example, revenue from Asia-Pacific markets rose 10% so far this year.
Illinois Tool Works is firing on all cylinders. The company generated growth in all of its operating segments over the first three quarters of the year, and expects at least 16% earnings growth for 2017. Its strong growth is due largely to its vast intellectual property; Illinois Tool Works has over 15,000 awarded or pending patents.
All three industrial stocks have dividend payout ratios near 50% or below. And, since earnings are likely to grow in 2017 and beyond, assuming the economy stays out of recession, they should have no trouble raising their dividends each year.

Industrial Stocks Deliver the Goods

Dover, 3M, and Illinois Tool Works have each returned more than 20% so far this year. They each have significantly outperformed the S&P 500 Index in terms of year-to-date returns. And, they continue to reward shareholders with rising dividends.
When investors think of dividends, utilities and REITs likely come to mind. These are strong dividend payers, but so are industrial stocks. Highly profitable diversified industrials like Dover, 3M, and Illinois Tool Works have provided annual dividend increases for over five decades.
And, each of them has a dividend yield above the 2% average yield in the S&P 500. As a result, they are each attractive stocks for a dividend growth portfolio.