Updated on March 22nd, 2019 by Jonathan Weber
Dividend stocks are a great way to build wealth in the long run, as dividends are one of the key factors for a stock’s total returns.
This is one of the reasons why the Dividend Aristocrats have outperformed the broader market. Dividend stocks also are able to generate a relatively reliable income stream that can help supplement retirement expenses.
Many traditional dividend stocks are from the healthcare and consumer staples industries, which generally aren’t very cyclical and where dividend payouts can thus be very consistent.
There are also attractive dividend stocks in other market sectors, such as the industrial sector. You can see the entire list of 747 dividend-paying industrial stocks here.
You can also access a downloadable spreadsheet below:
In this article we will take a look at the 10 dividend stocks from the industrial sector with the highest expected total returns over the next five years.
#10: Siemens (SIEGY)
Siemens is an industrial conglomerate that is active in several different industries, including Energy, Healthcare, Industry, and Infrastructure.
Siemens is headquartered in Munich, Germany, and was founded more than 160 years ago, in 1847. Siemens employs more than 370,000 people around the globe, and its market capitalization is $90 billion.
Siemens reported its first quarter (fiscal 2019) earnings results in January. The company announced that its revenues rose 2% year over year, to $23 billion, while earnings-per-share totaled $1.44 during the quarter.
Source: Siemens Investor presentation
One of Siemens’ largest competitive advantages is its huge order backlog, which has continued to grow during recent quarters.
The company achieved a book to bill ratio of 1.25 during the most recent quarter, thanks to major customer wins, which included wind parks, new metro trains for the London Underground system, and new trains for VIA Rail Canada.
The company’s backlog of $156 billion would allow Siemens to keep production unchanged even if there were no orders at all for 6 quarters in a row.
This large backlog, which can balance out cyclical lows in demand, helped Siemens remain profitable during the last financial crisis, which was not guaranteed at all for industrial conglomerates.
Siemens pays a dividend that yields 3.8% , although investors should note that Siemens does make only one dividend payment a year. Annual dividends are typical for companies based in German. In addition, dividends are subject to a 26% dividend withholding tax.
Siemens should be able to grow its earnings-per-share at a mid-single-digit pace going forward, through revenue growth and share repurchases.
We believe that Siemens should be able to achieve total returns of roughly 13% annually going forward, through a combination of its 3.8% dividend, 4%-5% earnings-per-share growth, and multiple expansion of 4%-5% per year.
#9: Northrop Grumman (NOC)
Northrop Grumman is an aerospace and defense company that dates back to 1939. Northrop Grumman was originally a builder of military aircraft, but over the years the company has moved into other segments including ammunition and space systems.
Northrop Grumman is not the largest company in its industry, but it is still a large cap with a market capitalization of $46 billion.
The company generates the highest amount of sales with its aerospace systems division, while the Mission Systems segment carries higher average operating margins (OM).
Northrop Grumman reported its most recent quarterly results in January. During the fourth quarter the company generated revenues of $8.2 billion, which was 25% higher than the same quarter last year.
This was possible thanks to growth across all segments, although the acquisition of Orbital ATK that closed during 2018 had a significant impact on Northrop Grumman’s revenue growth.
Once the acquisition has been lapped, growth rates may slow. That said, top line growth should remain at a solid level thanks to exposure to high-profile defense projects such as the F-35 program.
Northrop Grumman will, we believe, be able to generate earnings-per-share growth of ~10% annually going forward, through a combination of revenue growth, operating leverage, and share repurchases.
Including the 1.8% dividend yield and the impact of multiple expansion, total returns could reach 13%-14% per year over the next five years.
#8: Boeing (BA)
Boeing is the largest aerospace and defense company in the United States. Boeing derives the majority of its revenue from selling commercial aircraft, a market it controls in a duopoly with Airbus.
Boeing operates four segments: Commercial, Defense, Space & Security, and Global Services. The company is trading with a market capitalization of $210 billion.
Boeing recently entered the news due to the crash of two B-737 MAX 8 airplanes, which has dragged down the share price. According to most analysts, it is unlikely that this will have a large long-term impact on Boeing’s operations.
Boeing reported its most recent quarterly results on January 30. Revenue of $28 billion increased 14% from the same quarter last year. Revenue eclipsed $100 billion for the first time in the company’s history.
Revenue growth resulted in 30% earnings growth last year, to $16.01.
Source: Boeing earnings presentation
Boeing is very positive about its near-term as well as its long-term growth outlook. For 2019 Boeing forecasts earnings-per-share in a range of $19.90 to $20.10, which implies a ~25% growth rate over 2018.
Boeing also states that the commercial aircraft industry will continue to grow for decades, on the back of strong demand growth in countries such as China.
In addition, higher sales will come from ongoing replacement demand in mature markets. The growing services industry will also be a growth driver for Boeing, according to management.
We believe that Boeing will grow its earnings-per-share by 12% annually, due to revenue growth, operating leverage, and Boeing’s massive share repurchases.
Combined with a 2.2% dividend yield, partially offset by multiple compression of 0.5% per year, total returns are expected in a range of 13%-14% per year over the next five years.
#7: MSC Industrial (MSM)
MSC Industrial is among the largest marketers of metalworking and maintenance, repair, and operations products in North America. The company has a market capitalization of $4.5 billion and employs 6,500 people.
MSC Industrial was founded in 1941. Today, the company sells equipment such as cutting tools, abrasives, measuring instruments, and more.
MSC reported its most recent quarterly results (Q1 of fiscal 2019) in January. During the quarter the company generated revenue of $830 million, which was 8.2% more than the 2017 fourth quarter.
The company grew its earnings-per-share by 27% year over year, as earnings-per-share rose to $1.33 during the first quarter.
Source: Earnings presentation
The company guides for a solid revenue growth rate of 7% for the current quarter. Earnings-per-share are expected to decline, based on the one-time tax impact last year.
We believe that MSC Industrial will be able to grow its earnings-per-share meaningfully going forward. One factor is the ongoing consolidation of vendors by large customers, which seek to focus on nationwide suppliers such as MSC Industrial.
This should increase the company’s market share going forward. The trailing off of new investments should also allow the company to grow its margins over the coming years. We forecast an earnings-per-share growth rate of 6% annually for MSC Industrial.
Adding in the company’s dividend yield of 3.0% and multiple expansion of 4%-5%, total annual returns could reach 13%-14% going forward.
#6. Snap-On (SNA)
Snap-On Tools was founded in 1920, and has since grown into a full-service, global distributor of a huge array of specialty and common tools. The company trades at a market capitalization of $8.5 billion.
The company reported its most recent quarterly results on February 7. During the fourth quarter Snap-On’s sales declined slightly, with a ~2% forex headwind being the largest contributor.
Earnings-per-share totaled $3.03 during the quarter, up 13% year over year, despite the headwinds from lower revenue generation.
Snap-On’s management believes that the increasing complexity of new vehicles, due to a rising amount of assistance systems and other components, will lead to higher demand for repairs.
In turn, this should lead to higher demand for Snap-On’s tools. This is seen as a long-term growth driver for Snap-On’s revenues, as is the increasing age of U.S. vehicles:
Source: Investor presentation
Older vehicles need more repairs, which, once again, should be beneficial for Snap-On, as the company can sell more tools to workshops.
We believe that Snap-On will be able to grow its earnings-per-share by 8% annually going forward, through a combination of cost savings, acquisitions, buybacks, and some organic sales growth.
Snap-On offers investors a dividend that yields 2.4%, and on top of that investors should benefit from multiple expansion, as Snap-On’s shares trade well below their average valuation of 15 right now.
We believe that multiple expansion will add about 4% a year to the company’s total returns, which brings our total return estimate to 14%-15% annually going forward.
#5: American Airlines (AAL)
American Airlines is the world’s largest publicly traded airline company in terms of revenue generation and fleet size. The company, which operates about 950 airplanes, is headquartered in Fort Worth, TX, and is currently trading with a market capitalization of $14 billion.
The company reported its fourth quarter earnings results in January. During Q4 American Airlines generated revenues of $10.9 billion, which was 3.1% higher than the same quarter last year
American Airlines’ earnings-per-share totaled $1.04 during the quarter, which represented a 9.5% growth rate year over year.
American Airlines generated earnings-per-share of $4.55 during all of fiscal 2018, which was a new record year for the company.
Source: Investor Presentation
The company sees further revenue growth during 2019, based partially on the expansion at Dallas Fort Worth Airport, which will make DFW the second largest global hub.
American Airlines will also profit from the secular trend of growing air travel, for both business and leisure. This is a long-term tailwind for the company, although investors should note that airlines are highly vulnerable to recessions.
As long as the economy remains in a good shape, American Airlines should be able to continue to grow. We forecast an earnings-per-share growth rate of 5% per year, with a large portion of this earnings-per-share growth coming from share repurchases.
American Airlines offers a below-average dividend yield of 1.3%, but the company’s shares are so inexpensive that multiple expansion could add about 8%-9% annually to the company’s total returns.
This brings the total return estimate for American Airlines to 14%-15% annually over the next five years.
#4: Southwest Airlines (LUV)
Southwest Airlines is the second airline stock in this article. The company, which is valued at $28 billion, was founded in 1967 and is headquartered in Dallas, Texas.
Southwest Airlines does not operate a fleet as large as that of American Airlines, but the company has delivered strong returns for shareholders in the past nevertheless. Between 2008 and 2018 its earnings-per-share grew by more than 25% annually.
In the most recent quarter, Southwest Airlines reported 8.5% year-over-year revenue growth. The company grew earnings-per-share to $4.24 in fiscal 2018, which was 24% higher than the previous year.
Source: Company Presentation
Southwest Airlines stands out from the rest of the industry due to its very strong track record, as the company has not incurred an annual net loss in more than four decades.
Coupled with the very compelling earnings growth rates during the last decade, Southwest Airlines should be able to grow at an above-average rate going forward.
Growth will come from expansion of its operations, for example opening new routes to Hawaii, as well as through operating leverage and share repurchases. We forecast an earnings-per-share growth rate of 8% annually going forward.
In addition to the 1.3% dividend yield and multiple expansion of 5%-6% per year, Southwest Airlines is well-positioned to deliver total returns of 14%-15% annually going forward.
#3: ABB Ltd. (ABB)
ABB Ltd. is a provider of automation technologies and power solutions that has divided its operations into Electrification Products, Robotics & Motion, and Industrial Automation.
ABB is headquartered in Zurich, Switzerland, and has been operating since 1883. ABB is currently trading with a market capitalization of $41 billion.
ABB reported its fourth quarter earnings results in February. The company announced that it had generated revenue growth of 4% during the quarter, while order intake rose by an even better pace of 8% year over year.
ABB recently announced that it would sell the majority of its power grid business to Hitachi to focus on more promising and more profitable segments, such as Robotics & Motion and Industrial Automation.
The long-term secular trends of increasing automation in manufacturing, coupled with requirements of more energy-efficient manufacturing, are favorable to ABB.
These trends will drive demand for its products meaningfully over the coming years. We believe that ABB should be able to grow its earnings-per-share by 6% annually going forward.
The company offers a dividend that yields 4.2%, which is well above the broad market’s average yield. ABB also trades below the valuation range it has traded at historically, which should result in some multiple expansion over the coming years.
ABB could produce total returns of ~15% annually going forward, consisting of earnings-per-share growth (6%), dividends (4.2%), and multiple expansion (4.5%), which we deem to be a highly attractive total return estimate.
#2: HNI Corporation (HNI)
HNI Corporation started out as an office furniture manufacturer in 1944, but has since expanded into other segments such as hearth products (fireplaces, inserts, stoves).
HNI is a relatively small company, trading at a market capitalization of just $1.6 billion, but it is well positioned in the two industries it is active in.
HNI Corporation controls a multitude of brands, with which it serves almost every segment of its industry:
Source: Investor Presentation
The growth outlook for HNI is relatively positive, based on positive trends in both of its business units.
A strong economy in the U.S. and high confidence by business owners bodes well for HNI’s office furniture operations. Small business and corporations are likely to spend money on renovations and renewals during periods of economic growth.
At the same time HNI’s hearth products are not only being included into newly built houses, but also into remodeled real estate.
Remodeling activity in the U.S. is rising, which is also a positive for hearth products demand, and which can be explained by rising disposable incomes and low unemployment. HNI is likely to grow its earnings-per-share by 6%-7% annually going forward.
HNI offers a dividend that yields 3.2%, which is about one and a half times the broad market’s yield, and there is substantial potential for multiple expansion on top of that.
Shares trade for less than 14 times this year’s profits right now, whereas HNI’s shares have historically been valued at a high teens earnings multiple.
Multiple expansion could add 5%-6% to the company’s annual total returns going forward. Combined with the forecasted earnings growth rate and the dividend yield, total returns are estimated at ~15% for HNI stock over the coming years.
#1: Caterpillar (CAT)
Caterpillar is the world’s largest publicly traded equipment manufacturer. The company serves two major markets, the construction industry and the extraction/mining industry.
Caterpillar was founded in 1925 and has turned into an industrial giant that is being valued at $77 billion over those more than 90 years.
Caterpillar reported its most recent quarterly results in January. During the fourth quarter Caterpillar grew its revenues by 11% year over year, to $14.3 billion.
This strong revenue growth rate, coupled with operating leverage, lower taxes, and a declining share count, has allowed Caterpillar to grow its earnings-per-share by 18% year over year, to $2.55.
During all of fiscal 2018 Caterpillar has generated earnings-per-share of $11.20, which represents a new record year for the company.
2018 was a big year for Caterpillar, as the company achieved the milestone of raising its dividend for 25 years in a row.
Going forward Caterpillar should be able to grow its revenues as well as its profits, as construction activity remains strong in countries such as the U.S. and China.
In addition, share repurchases and cost-cutting programs should benefit Caterpillar’s earnings-per-share growth. We forecast that earnings-per-share will rise by 6% annually going forward.
Caterpillar stock trades at just below 11 times this year’s earnings per share, which is substantially lower than the historical average of approximately 15 times earnings.
Multiple expansion could be a major factor for Caterpillar’s total returns going forward, estimated at ~7% annually.
Together with the earnings-per-share growth rate and the dividend that yields 2.6% right here, Caterpillar has a chance to deliver total returns of 15%-16% annually going forward.
This makes Caterpillar the top industrial stock with the highest total return outlook over the next five years.