Investing in dividend paying Industrials stocks is a good way to build long term wealth. This is especially true for younger and older investors alike and those who have years out to retirement. Industrial Stocks form the backbone of the global economy without which life would not progress and thrive. We have categorized Industrials Stocks in 5 main categories below. They are:
- Construction – Companies that use machinery equipment to provide civil engineering services, nuclear waste clean up, disaster rebuilding, LNG export terminals and oil refineries, airport terminals and city skyscrapers, etc. Think of companies such as PCL Construction, Jacobs Engineering, Fluor, Eaton Corp, etc.
- Defense – Governments around the world are spending record sums of dollars on defense equipment. In fact, the United States Department of Defense’s budget for national security in 2021 was a whopping $705.4 billion! Examples of equipment purchased in this budget including war submarines, combat vehicles, communications equipment, ships and sea-based interceptors, etc. Think of companies such as Lockheed Martin, General Dynamics, Raytheon, etc.
- Machinery – Cities with growing populations around the world are using density to create housing. This means bulldozers, cranes and tractors are needed to build the communities people live in. Think of Caterpillar, Deere, Komatsu, Hitachi and other machinery companies. Not only is this machinery required to build housing, but also airports, hospitals, roads and bridges across the world.
- Manufacturing – Companies that manufacture capital goods used in the finishing of the final manufacturing product also fall in the Industrials category. Think of companies such as 3M, Honeywell, Illinois Tool Works and Northrop Grumman. 3M manufactures over 60,000 industrial products used by other companies.
- Transportation – Transportation is a sub-group within the Industrials sector comprised of companies that provide air freight, logistics, road and rail, airlines, marine and trucking, etc. As an example, airlines such as JetBlue, Delta, Alaska Air and Southwest are included in Industrials sector. FedEx and UPS that provide consumer and business mail delivery are also included. Some of the top holdings within Industrials sector comprise of Union Pacific, CSX Corporation and Norfolk Southern which are rail roads.
In this article, we review the top 10 dividend stocks in the S&P 500 Industrials Sector (XLI) ETF. These stocks are determined using criteria such as dividend yields and dividend growth, cumulative average revenue growth over the last 5 years (CAGR), operating cash flows, price to earnings and price to sales ratio, etc. The fundamentals of the underlying business also matter significantly, as well as where is future growth opportunities.
This article also provides an Excel Spreadsheet of all 74 Stocks in the XLI Industrials ETF with useful metrics including:
- Market Capitalization
- 2019 Revenues
- Forward Price to Earnings (PE) Ratio
- Dividend Yield
- Dividend Payout Ratio
- 5 Year Revenue Growth
- 5 Year Earnings Growth
- 5 Year Dividend Growth
- Price to Sales Ratio
- Return on Equity (%)
- % of Institutional Shareholders
Table of Contents
This article is broken down in to sections, feel free to jump to the area that interests you.
- Sectors of S&P 500 Industrials (XLI)
- Performance of S&P 500 Industrials (XLI) Vs S&P 500
- Download Microsoft Excel Spreadsheet of 74 Industrials Stocks
- Review of Top 10 Picks
What Sectors Comprise of the S&P 500 Industrials (XLI) ETF?
There are 12 categories of companies within the S&P 500 Industrials (screenshot below with weightings). Machinery, Aerospace, Defense and Industrial Conglomerates make up over 50% of the total index.
- Machinery – 19.79%
- Aerospace & Defense – 19.28%
- Industrial Conglomerates – 13.15%
- Road and Rail – 12.67%
- Air Freight & Logistics – 9%
- Electrical Equipment – 5.6%
- Building Products – 5.5%
- Commercial Services & Supplies – 5.29%
- Professional Services – 3.9%
- Airlines – 2.7%
- Trading – 2.4%
- Construction & Engineering – 0.84%
Performance of XLI Versus S&P 500
Over the last decade, XLI has gained 284% while the S&P 500 has advanced by 221.5%. This is an out performance of 62.5%. Using Compounded Annual Growth Rate (CAGR) metric, the S&P 500 has gained 12% while XLI has gained 13.9% annually.
The Team at Dividend Scholar.com firmly believes in the power of dividend compounding and we see it in display here. A 1.9% out performance compounded annually over a period of 10 years can result in huge long term wealth.
Download Microsoft Excel Spreadsheet of XLI Industrial Stocks
Click here to download a Microsoft Excel Spreadsheet containing list of all stocks in the S&P 500 Industrials. Below are instructions on how to screen the worksheet to find investment ideas.
Screen #1: Highest Dividend Yield Stocks in S&P 500 Industrials (XLI)
Step #1: Open file after downloading.
Step #2: Click anywhere on Row 1, hit the “Data” tab and click “Sort.” Enter these parameters.
Sort By: Dividend Yield, Sort On: Values and Order: Largest to Smallest
Attached is a screenshot of the Excel file displaying the results of this screen.
The highest dividend yielding stock in S&P 500 Industrials ETF is a less well known company Ingersoll Rand at 4.69%. The remaining companies are familiar brands including 3M, Delta Airlines, Emerson Electric, Eaton, Cummins, UPS and Caterpillar offering dividend yields between 2.5% to 4%.
Screen #2: Largest Market Capitalization Stocks
Step #1: Click anywhere on Row 1, hit the “Data” tab and click “Sort.” Enter these parameters.
Sort By: Market Capitalization, Sort On: Values and Order: Largest to Smallest
Attached is a screenshot of the Excel file displaying the results of this screen.
It is interesting to note that the highest market capitalization stock in the S&P 500 Industrials ETF is UPS at almost $150 billion, followed by Honeywell at $148 billion, Union Pacific at $136 billion and Boeing at $123 billion.
UPS has been a strong performer thanks to tailwinds such as ECommerce and online shopping as well as working from home requiring a reliable shipping company to deliver billions of packages each month.
Screen #3: Stocks with the Lowest Price to Earnings (PE) Ratio
Step #1: Click anywhere on Row 1, hit the “Data” tab and click “Sort.” Enter these parameters.
Sort By: Forward PE Ratio, Sort On: Values and Order: Smallest to Largest
Attached is a screenshot of the Excel file displaying the results of this screen.
It is not surprising that lowest forward price to earnings ratio (PE) stocks in S&P 500 Industrials ETF are the airlines including American Airlines and Delta at 8.3 and 9.75. Due to the Corona virus pandemic, the travel industry has been decimated and travel stocks are trading at very cheap valuations, as measured by price to earnings (PE) ratios.
Without further due, let’s present the top 10 Industrials Stocks in the S&P 500 that we like.
- Union Pacific Corp. (UNP)
- Deere & Company (DE)
- CSX Corporation (CSX)
- Norfolk Southern Corporation (NSC)
- Cummins Inc. (CMI)
- Waste Management (WM)
- United Parcel Service (UPS)
- Honeywell International (HON)
- Caterpillar (CAT)
- Cintas (CTAS)
1) Union Pacific Corp. (UNP)
Union Pacific Corp. is our #1 pick thanks to strong out performance to the S&P 500 over 10 years, a 1.9% dividend yield and a dividend growth rate of 12.5% annually over the last 5 years. In the last decade, Union Pacific Corp. Stock has risen by 699% in value far outpacing the growth of the S&P 500 which has gained 221%.
Union Pacific plays a very important role in America’s supply chain solutions. The company owns and maintains rail roads that connect 23 States in Western USA and serves the fastest growing population centers in that area.
It also operates in West Coast and Gulf Coast ports and connects to Canada, Mexico and eastern gateways in US. Union Pacific serves over 10,000 customers and 40% of all freight is originated or terminated outside of the US.
The company does business in 3 segments. They are:
- Bulk – Transports grains, refrigerated foods, fertilizer, coal and renewables via railroads. This segment generated $6.53 billion in operating revenues in 2019.
- Industrial – Transports industrial chemicals, lumber, plastics, copper and iron ore via railroads. It generated $7.47 billion in revenues in 2019.
- Premium – Transports finished automobiles and automotive parts in intermodal containers. It generated $6.42 billion in revenues in 2019.
Union Pacific sports a $137 billion market capitalization and pays a 1.9% dividend yield. This yield is 20 basis points higher than the yield paid by S&P 500 companies. The corporation generated $21.7 billion in revenues in 2019 and earned a net income of $5.92 billion, implying a healthy 27.2% net profit margin.
We like owning UNP Stock for the long term because the company has a competitive moat around its business. It owns 32,340 miles of rail road networks, 6416 locomotives and 34,044 freight cars.
Another competitor will find it very hard to duplicate this network including going through regulatory checks and permits. What’s more, owning such a diverse far reaching network gives management pricing power.
We also like the company’s strong free cash flows. After spending $3.4 billion in capital expenditures in 2019 and paying $2.598 billion in dividends, the company had free cash flows of $2.576 billion. Investors are therefore rewarding the company with a high Price to Earnings and Price to Sales ratio. Not to mention the company has grown its dividend at a compounded annual growth rate (CAGR) of over 12% in last 5 years.
Over the last decade, Union Pacific has grown revenues from $14.14 billion in 2010 to $21.7 billion as of 2019. This represents a healthy compound annual growth rate (CAGR) of 4.4%. The company’s revenues hit a peak of $24 billion in 2014 but have since been trending down due to a drop in coal freight, fuel and oil prices.
A lower oil price means less railroad shipments by crude oil producers, who instead will wait for pipelines to be built as it is cheaper to transport oil through pipelines versus by rail.
In 3rd Quarter 2020 earnings released October 22nd, 2020, Union Pacific reported operating revenues of $4.9 billion and net income of $1.4 billion. Operating revenues was down 11% year over year while net income declined by 12.5%.
2) Deere & Company (DE)
Deere & Co. is our #2 pick thanks to consistent revenue growth, a dominant market leading position in agricultural, forestry and construction equipment, 5 year annualized dividend growth rate of 4.85% which although seems low, is quite healthy in the industrial sector along with a mission to feeding the world’s growing population, empowering global prosperity and protecting natural resources.
We like Deere’s shareholder friendly management that has taken steps to reward shareholders over the long term including growing dividends 171% since 2010, buying back shares and reducing overall share count by 37% since 2004 and maintaining revenue growth of 3% CAGR over 30 years.
Deere & Co. does business in 3 segments. They are:
- Agriculture & Turf – Manufactures farm and harvest equipment such as sprayers & applicators, cutters and shredders, loaders and tractors, planting equipment, etc. It generated $24.1 billion in revenues in 2019.
- Construction & Forestry – Manufactures construction equipment such as dozers, excavators, dump trucks, crawler loaders, scraper systems, etc. It generated $11.5 billion in revenues in 2019 and is a direct competitor to Caterpillar.
- Financial Services – This division allows Deere customers to finance and lease large equipment through various dealers around the world. It earned $539 million in net income in 2019 with a net owned portfolio of $47 billion.
Deere & Co. sports a $79.4 billion market capitalization and pays a 1.2% dividend yield. This yield is 45 basis points lower than the yield of 1.65% paid by S&P 500 companies. The average 5 year dividend growth rate is also just under 5%.
DE Stock has rewarded long term shareholders with healthy capital gains and strong out performance to the S&P 500. As a matter of fact, over the last decade, Deere Stock has gained 327% while the S&P 500 is up 208%.
Deere has managed to grow revenues from $26 billion in 2010 to $37.3 billion as of 2019. This represents a healthy 3.7% top line revenue growth. There are various tail winds in favor of the company including a growing worldwide population expected to exceed 11.2 billion people by the end of this century. As of 2019, the world’s population is 7.7 billion.
In its 4th quarter earnings released November 25th, 2020, Deere & Co. reported $9.731 billion in enterprise wide revenues and net income of $757 million. Revenues were down 2% year over year. In year 2021, management guided net earnings in the range of $3.6 to $4 billion and a rebound in demand for farm equipment.
Deere’s management has established criteria for careful capital allocation including investing in research and development for future growth, and rewarding income investors with dividend increases. This has investors paying a premium for Deere Stock which trades at a price to earnings ratio of 29 times.
The company spent $2.9 billion in R&D in 2019 and paid $2.2 billion in dividends. After these cash outlays, it managed to add $1.5 billion in economic profit or shareholder value added (SVA).
Investors can also count on Deere’s management to make smart acquisitions such as the buyout of Wirtgen Group for $5.2 billion in December 2017. Wirtgen Group is a leading German manufacturer of road construction equipment such as cold milling machines, recyclers and soil stabilizers and road pavers, etc. The Wirtgen Group has 5 major brands and added almost $3 billion to Deere’s 2018 revenues.
3) CSX Corporation (CSX)
CSX Corporation is our #3 pick thanks to a strong out performance to the broader market, a network that reaches nearly 2/3rds of the entire US population, assets consisting of locomotives and rail roads that reach 26,000 track miles, a competitive moat that cannot be easily duplicated, 8.2% dividend growth rate annualized over the last 5 years and a long term uptrend in CSX Stock.
CSX Corporation does business in 3 segments. They are:
- Merchandise – Transports products such as chemicals, automotive, food products, minerals, fertilizers and forestry products. It shipped 2.7 million car loads in 2019 and generated $7.61 billion in revenues.
- Coal – Moves coal, coke and iron to electricity generating power plants, manufacturers of steel and other industrial plants. It shipped 843,000 car loads and generated $2 billion in revenues in 2019.
- Intermodal – This segment combines the power of transporting over rail roads with the flexibility of trucks when needed. This combination offers a significant cost savings over long haul trucking. The intermodal unit carries mostly finished consumer goods and generated $1.8 billion in revenues in 2019.
CSX Corporation sports a $70.25 billion market capitalization and pays a 1.1% dividend yield. This yield is 55 basis points lower than the yield paid by S&P 500 companies at 1.65%. We also like CSX Stock’s 5 year annualized dividend growth rate of 8.2%.
Even though the dividend yield is low, CSX Stock has rewarded shareholders over the long term by doubling the performance of the S&P 500. While the S&P 500 has gained 202% in the last 10 years, CSX Stock has gained a whopping 418%!
CSX Corp. has grown revenues from $9.04 billion in 2010 to $11.94 billion in 2019. This represents a long term revenue growth rate of 2.8% annualized over the last decade. This is an impressive performance given the company operates in an environment of low commodity prices including crude oil, natural gas and coal.
In 3rd Quarter earnings released on Oct 21st, 2020, CSX generated revenues of $2.648 billion and earned net income of $736 million. Earnings per Share came in at $0.96 per share, an 11% decline year over year from 2019’s EPS of $1.08 and net income of $856 million. Declines in coal and merchandise volume due to effects of Covid-19 pandemic was the reason for this decline.
We like management’s long term plans to convert more trucking customers to CSX Corporation. According to the company’s presentation at Baird Global Industrials Conference, total US Freight revenues are $980 billion annually, and CSX has captured just 1% of this market.
The company believes enhanced marketing, a good brand and improved customer experience will help it win more trucking customers over the long term.
CSX Board of Directors also authorized a share repurchase program of $5 billion on top of the $1.1 billion remaining under the old repurchase plan. This is the company’s commitment to rewarding shareholders by increasing stock value and earnings per share.
4) Norfolk Southern Corporation (NSC)
Norfolk Southern Corporation is our #4 pick thanks to a railway network of 19,500 miles present in 22 states, serving every major port container in the Eastern United States.
The company generates healthy cash flows each year after paying for capital expenditures, operating expenses and dividends/share repurchases. NSC Stock currently has a dividend yield of 1.6% which is in line with the S&P 500 and has a 5 year dividend growth rate of 10%, which is very respectable.
Norfolk Southern Corporation does business in 3 segments. They are:
- Merchandise – Generated $6.8 billion in revenues in 2019 and transports products like chemicals, soybeans and fertilizers, steel and aluminum, motor vehicles and parts, lumber and wood products, etc. Merchandise carloads transported in 2019 equaled 2.4 million.
- Intermodal – Intermodal consists of domestic and international containers and trailers and accounted for $2.8 billion in revenues in 2019.
- Coal – Coal unit handled 102 million tons or 0.9 million carloads of coal products transported to industrial sites, electricity generating plants and various terminals.
Norfolk Southern (NSC) sports a $60 billion market capitalization and pays a 1.6% dividend yield. This yield is in line with the dividend paid by S&P 500 companies. Management has grown its dividend at an annualized rate of 9.8% over the last 5 years, which is a strong performance.
We like the fact that NSC Management has managed to keep its dividend payout ratio below 40% in each of the years from 2017 to 2019. Dividend payout ratio in 2019 stood at just 35%, allowing the company to grow its business, invest in new rail roads or make acquisitions as well as repurchase shares.
NSC has grown revenues from $7.97 billion in 2010 to $11.3 billion as of 2019. This represents a compounded annual growth rate (CAGR) of 3.5% which is higher than its competitor CSX Corporation at 2.8% and but lower than Union Pacific at 4.4%.
Strong financial management has allowed NSC Stock to out perform the S&P 500 over the last decade. During this time period, NSC Stock has gained 375% while the S&P 500 has gained 199%.
In its 3rd Quarter, 2020 earnings released on October 28th, 2020, Norfolk Southern reported revenues of $2.5 billion and net income of $569 million. Revenues were down 12% year over year thanks to decline in total transport volumes. However, NSC maintained a very healthy net profit margin of almost 23%.
Another key reason why Norfolk Southern is a good stock to own is Management’s approach to growing the business by working with customers and government agencies to identify sites that can be served via its railroad, developing related infrastructure with services like site planning, layout, track design and supply chain analysis.
According to its press release, in 2019, NSC worked with 77 customers that opened new facilities served by its rail network. Total investment was nearly $2 billion creating 1160 customer jobs and generating 62,300 carloads of new rail traffic.
5) Cummins Inc. (CMI)
Cummins is a global leader that manufactures diesel, natural gas, electric and hybrid powertrain engines, components, fuel systems, batteries, hydrogen fuel cell products, etc. It serves customers in 190 countries globally through 600 company-owned locations and 7600 dealer partners. The company is a cash generating machine, achieving $3.2 billion in operating cash flow in 2019.
We like CMI Stock thanks to a strong 2.5% dividend yield, which is 90 basis points higher than the yield paid by S&P 500 companies. Cummins Stock also has a strong 5 year dividend growth rate of 8.5% with a low dividend payout ratio of just 34%. This is very enticing for long term income investors who appreciate a higher yield now plus healthy annual growth.
Cummins Incorporated does business in 5 segments. They are:
- Engine – Builds a variety of diesel and natural gas powered engines for medium and heavy duty trucks, buses, RVs and other recreational automotives in a variety of industries including rail, marine, oil and gas, defense and agricultural markets. It generated $8 billion in revenues in 2019, accounting for 34% of all revenues.
- Distribution – Distribution unit generated $6.4 billion in 2019 revenues. It does core functions including sales, service and customer support through wholly-owned or independent dealers in 190 countries.
- Components – Components unit earned $5.65 billion in 2019 revenues. It sells complementary products to the engine segment including turbochargers, fuel and filtration systems, automated transmissions, etc.
- Power Systems – Power Systems generated $3.54 billion in 2019 revenues and primarily builds power generators, paralleling systems and transfer switches.
- New Power – This is a newly created unit after the acquisition of Canadian fuel cell and hydrogen production technologies company known as Hydrogenics. Alternative and clean fuel energy is all the rage in the 21st century and Cummins wants to capitalize on this opportunity by developing hydrogen powered engines used for long-haul trucking, shipping and other industrial processes.
Cummins Inc. sports a $32.4 billion market capitalization and pays a 2.5% dividend yield. This yield is 90 basis points higher than the yield on the S&P 500 index, making it a great holding for long term income investors. What’s more, management has grown this dividend at 8.5% annualized over the last 5 years, making this an attractive holding for dividend growth investors.
Cummins Inc. has grown revenues from $10.8 billion in 2010 to $23.57 billion in 2019. This represents a compounded annual growth rate (CAGR) of 8%, which is a phenomenal performance. In 3rd Quarter earnings released October 27th, 2020, Cummins reported revenues of $5.1 billion and net income of $501 million. This implies a 10% net profit margin. The company also generated record cash flow in the quarter, of $1.2 billion.
We like Cummins (CMI) Stock for growth opportunities in developing Hydrogen Fuel Cell technologies. According to Cummins Hydrogen Day Presentation, 66 countries have committed to net zero Carbon emissions target by the year 2050. Cummins will participate in this by producing hydrogen energy, dispensing and storing through 700 bar stations and manufacturing low cost and highly reliable fuel cell modules.
As a matter of fact, Cummins plans to grow its Electrolyzer business to $400 million in revenues by the year 2025 and sell 100 fuel cell systems trains.
6) Waste Management (WM)
Waste Management Inc. is North America’s premier provider of waste collection, recycling, landfill and environmental services to over 20 million customers with ownership of 244 landfills and 5 hazardous waste landfills. The company has an unrivaled size and scale employing 44,900 employees, operating 302 transfer stations and owning almost 9000 alternative fuel vehicles to carry and dispose waste. We like WM Stock because it is a cash flow generating machine generating $3.9 billion in cash from operations in 2019 after spending $1.8 billion in capital expenditures.
Waste Management conducts business in 5 segments. They are:
- Collection – This unit picks up waste and recyclables and transports them to landfills, transfer stations, composting or material recovery facilities. It generated $8.5 billion in revenues in 2019.
- Transfer – This segment transfers waste to a network of 300+ disposal sites leveraging the company’s landfills and recycling sites. It generated $1.5 billion in revenues in 2019.
- Landfill – This unit consists of 250 landfill sites spread out across Canada and United States generating $3.25 billion in revenues in 2019.
- Recycling – Recycling transforms waste to its next best use through materials processing, recycling commodities, organics, etc. It generated $775 million in revenues in 2019.
- Other – Other segment generated $1.4 billion in revenues in 2019.
Waste Management sports a $49 billion market capitalization and pays a 1.9% dividend yield. This yield is 30 basis points higher than the yield paid by the S&P 500 index which is at 1.6%. Management has also grown its dividend at a 5 year annualized growth rate of 7.2%.
This consistent dividend growth rewards long term shareholders. What’s more, WM Stock has crushed the performance of the S&P 500 index over the last decade. WM Stock has risen 342% in the last decade, while the S&P 500 is up 199%.
Waste Management has grown revenues from $11.79 billion in 2010 to $15.46 billion in 2019. This represents a healthy compounded annual growth rate (CAGR) of 2.75%. We like management’s careful approach to capital allocation including a 3-year capital expenditures rate of $1.67 billion annually, target of 40% to 50% for dividend payout ratio, share buybacks of $2 billion over the past 3 years and $1.2 billion invested in 74 acquisitions in the last 3 years.
In its 3rd Quarter, 2020 earnings released on November 2nd, 2020, WM reported $3.861 billion in revenues and $390 million in net income, implying a 10% net profit margin. Operating cash flow in the quarter was a superb $1.03 billion. We also like the recession resilient nature of WM’s business as garbage collection will still be needed during tough economic times.
The company has a diverse customer base with recurring revenues that are indexed to inflation each year. Examples of diverse customer bases are retail trade, public agencies, office and venues, health care, real estate and leasing, accommodation and food services, etc.
This fact is also proven because during the 2008 financial crisis, the S&P 500 index dropped 56% from peak to trough. Waste Management Stock however dropped just 43%, from its peak of $27.2 in July 2007 to $15.5 in March 2009.
7) United Parcel Service (UPS)
Founded in 1907 as a small company, UPS today is the world’s largest package delivery enterprise delivering an average of 21.9 million packages per day or 5.5 billion annually to 9.9 million receiving customers in over 220 countries. UPS also operates the largest fleet of airplanes in the world along with alternative-fuel powered vehicles.
Amazon is the company’s largest customer accounting for 11.6% of consolidated revenues in 2019. We like UPS Stock as a long term core holding for income investors because the company generates a massive amount of free cash flow, $2.26 billion in 2019 even after spending $6.38 billion in capital expenditures, $3.3 billion in dividends and $1 billion in share repurchases.
United Parcel Service operates in 3 business segments. They are:
- US Domestic Packages – This is the largest segment generating $46.5 billion in revenues in 2019 with average daily small package volume of 15 million parcels. Customers are guaranteed shipping in 1-3 days depending on their preference. For parcels that are not time sensitive, the company offers UPS SurePost with its reliable ground network with final delivery made by the US Postal Service.
- International Packages – This segment generated $14.22 billion in revenues in 2019 and ships in 220 countries globally. Europe accounts for more than 50% of this total revenue and the company is making significant investments in major European cities including London, Paris and Eindhoven, Netherlands.
- Supply Chain & Freight – This division generated $13.38 billion in revenues in 2019 and includes mail forwarding, truckload logistics and freight and UPS Capital. As an example, the logistics segment operates over 5 million square feet of distribution center space serving major healthcare and life science customers while UPS Freight offers less than truckload freight to all 50 states while UPS Capital offers insurance services on goods transported.
UPS Stock sports a $145.6 billion market capitalization and pays a 2.4% dividend yield. This yield is 80 basis points higher than the yield on the S&P 500 index, at 1.6%. Management has also grown its dividend at a decent 6.7% annualized clip over the last 5 years.
What’s more, UPS Stock has a dividend payout ratio of 50% which allows the company to allocate more cash to capital expenditures, grow delivery routes, acquire more planes, etc. In terms of stock performance, UPS has out performed the S&P 500 over the last decade by 17%. While the S&P 500 has advanced 199% over the last 10 years, UPS Stock has risen 217%.
United Parcel Service has grown revenues from $45.3 billion in 2010 to $74.09 billion as of 2019. This represents a healthy 5% annualized revenue growth over the last 10 years. The company has tailwinds in its favor including the rise of Ecommerce and shopping on Amazon and Walmart websites.
As a matter of fact, UPS has placed shipping limits on some of the largest retailers during the 2020 holiday season with sales breaking records, including surpassing $5.1 billion in thanksgiving, $10.8 billion in Cyber Monday and $9 billion in Black Friday sales. To deal with this peak demand, UPS has added 14 airplanes and opened 20 new facilities to handle volumes.
8) Honeywell International (HON)
Honeywell is an Industrial giant that invents and commercializes technologies that solve some of the world’s most critical problems and opportunities around safety, security, energy, air travel, global urbanization and productivity. The company generated $36.7 billion in revenues in 2019 and earned a net income of $6.14 billion. This implies a strong 17% net profit margin for a company this size.
Honeywell conducts business in 4 segments. They are:
- Aerospace – Aerospace division supplies original equipment manufacturers (OEMs) with aircraft products, software and services and generated revenues of $14.05 billion in 2019 and $3.6 billion in net profit. It is the largest segment by revenues and sells products such as propulsion engines, integrated avionics, electric power systems, flight safety communications, radar and surveillance systems, etc.
- Honeywell Building Technologies – This segment supplies residential and commercial building owners with products that make their units safe, energy efficient and sustainable and generated revenues of $5.72 billion in 2019 and $1.16 billion in net profit. Examples of products sold include building control and optimization, sensors, switches, video surveillance, fire products, etc.
- Performance Materials & Technology – This segment is the 2nd largest in terms of revenues and generated $10.83 billion in sales in 2019 and $2.43 billion net profit. Examples of products include automation control and advanced software for oil and gas sectors, pulp and paper, chemicals and petro chemicals, life sciences, biofuels and minerals/metals. Another cool segment is Honeywell Forge that sells cybersecurity software to protect corporations and their networks.
- Safety & Productivity Solutions – This segment sells products like safety gear, gas detection technology, cloud based emergency notifications and messaging, custom-engineered sensors, warehouse automation equipment, etc. It generated $6.1 billion in revenues and $790 million in net profit.
Honeywell sports a $147.4 billion market capitalization and pays a 1.8% dividend yield. This yield is 20 basis points higher than the yield on the S&P 500 index. Management has also grown the dividend at a compounded annual growth rate (CAGR) of 11% over the last 5 years. This is well above inflation and very strong for an Industrial giant.
Over the last decade, Honeywell has grown revenues from $32.35 billion in 2010 to $36.7 billion in 2019. This represents a compounded annual growth rate (CAGR) of 1.3%.
We like HON Stock because of management’s capital deployment strategy. In 2019, the company spent $7.8 billion in various initiatives including $4 billion in share repurchases, $800 million in capital expenditures, $2.4 billion in dividend payments, etc.
Management is looking to make bolt-on acquisitions that increase earnings per share and revenues over the long term, as well as sustain dividend growth in line with earnings per share growth. In its May 2019 Investor Presentation, the company states acquisitions remain a top priority however valuations continue to be very challenging.
9) Caterpilar (CAT)
Caterpillar is the world’s leading manufacturer of construction and mining equipment, electric locomotives, diesel and natural gas engines and turbines, etc. The company has been in existence since 1925 and sells over 4 million products worldwide through 165 dealers in 191 countries. 58% of Caterpillar’s sales are generated outside of the United States, which proves just how much scale it has globally. Total revenues generated in 2019 equaled $53.8 billion.
Caterpillar conducts business in 4 segments. They are:
- Construction – This segment generated $22.6 billion in revenues in 2019 and earned $3.9 billion in profits. It sells machinery to customers in infrastructure, forestry and building construction industries. Examples of products sold are asphalt pavers, excavators, compactors, wheel loaders, pipelayers, etc.
- Resources – This division generated $10.3 billion in revenues in 2019 and $1.6 billion in profits. It helps customers extract iron ore, coal, oil sands, gold and other minerals with equipment like hydraulic shovels, mining trucks, large wheel loaders, wheel dozers, soil compactors, etc.
- Energy & Transporation – This unit generated $22.1 billion in 2019 revenues and earned $3.9 billion in profit. This unit sells products to customers in oil and gas, power generation, marine and rail industries, etc. Examples of products sold include diesel electric locomotives, turbines, reciprocating engines, powered generator sets, integrated systems, etc.
- Financial Products – This unit provides retail and wholesale financing and insurance for Caterpillar products through Cat Financial.
One of Caterpillar’s core competitive strength is its extensive sales and service network of 165 dealers located in over 2300 branches, and serving 191 countries globally. When customers buy a Caterpillar machine, they know they will be supported by the most capable and reliable global service network.
Management is also rewarding shareholders having authorized $10 billion in share repurchases in July 2018. Of this, $4.05 billion was repurchased in 2019. Caterpillar also increased its dividend by 20%, to $4.12 per share in 2019. CAT Stock is a member of the prestigious S&P 500 Dividend Aristocrats index, an elite group of companies that have raised dividends for at least 25 years in a row. Caterpillar was a new addition in 2019, having now raised its dividend for 26 consecutive years.
Management is planning for growth by increasing its Services revenues in Machinery, Energy & Transportation segments (ME&T) to $28 billion by 2026, up from just $18 billion in 2019. It plans to do this by using data analytics and artificial intelligence capabilities to help its customers succeed.
Examples include increased visibility for mining trucks when they are deep underground, helping small business owners find rental equipment with the click of a mouse button, digitally connect and monitor assets for increased security and maintenance, etc.
Caterpillar sports a $98.4 billion market capitalization and pays a 2.3% dividend yield. This yield is 70 basis points higher than the yield on the S&P 500 index. The company has also grown its dividend at a compounded annual growth rate (CAGR) of 7% over the last 5 years.
We also like the fact that management strives to keep its dividend payout ratio at about 50%, so more cash goes towards innovations and technology to drive future growth.
10) Cintas (CTAS)
Cintas is among our top 10 Industrial Stocks picks due to a strong out performance to the S&P 500 over the last decade, 5 year annualized dividend growth rate of 27%, 36 years of consecutive dividend increases, a competitive moat of 1 million customers being served through 11,000 routes that cannot be easily duplicated by a new entrant, along with a significant opportunity to grow and serve America’s 16 million businesses.
Cintas sells products and services that help businesses look professional and keep their facilities clean including uniforms, mats, restroom supplies, mops, first aid kits, fire extinguishers and other safety products. It generated revenues of $7.085 billion in 2020 and earned a net income of $876 million. Cintas does business in 2 segments. They are:
- Uniform Rental & Facility Services – This segment sells or rents uniforms and garments including flame resistant clothing, shop towels, mops, mats and supporting products. It also proves restroom and carpet cleaning services and supplies, etc. It generated $5.64 billion in revenues in 2020.
- First Aid & Safety Services – This segment sells first aid kits, safety products and provides training/compliance services. It generated $708 million in revenues in 2019.
- All Other – Other segment includes fire protection services and other ancillary revenues. It generated $733 million in 2019 revenues.
A major competitive advantage that Cintas has built is 11,100 uniform delivery routes supported by 472 operational facilities and 12 distribution centers. The company also employs 40,000 people. Knowing that service will be exceptional and uniforms and other products will be delivered in a timely fashion with good quality is what makes Cintas stand out from competitors.
Cintas Stock sports a $35.5 billion market capitalization and pays a tiny 1% dividend yield. However, the 5 year average dividend growth rate annualized is a whopping 27.3%. The stock has also rewarded shareholders with a stunning 1,278% gain over the last 10 years, resulting in a compounded annual growth rate (CAGR) of 29%.
Management has been rewarding shareholders with a $1 billion share repurchase authorization in October 2018 and another $1 billion in October 2019. No wonder Cintas Stock commands an expensive valuation, trading at a forward price to earnings ratio of 37 times (using 2021 earnings estimates).
Over the last 10 years, Cintas has grown revenues from $3.81 billion in 2009 to $7.085 billion in 2020. This represents a compounded annual growth rate (CAGR) of 6.4% in top line revenues, which is a spectacular long term performance. CTAS Stock has lots of tailwinds in its favor as it has only captured 1 million out of 16 million businesses in America. The company has lots of runway for continued long term growth.