Dividend stocks are a great way to build wealth in the long run, as dividend payments are one of the key factors for a stock’s total returns. This is also why the Dividend Aristocrats and Dividend Kings outperformed the broad markets repeatedly. Dividend stocks also are able to generate a relatively reliable income stream that can finance or supplement one’s livelihood.

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. But there are attractive dividend stocks in other sectors as well. In this article, we will take a look at the 10 dividend stocks from the industrial sector in the Sure Analysis research database with the highest expected returns over the coming five years.

Industrial companies oftentimes face more cyclical demand for their products, but when they establish themselves in a niche or build out best-of-breed technology they can be highly profitable, which makes them attractive as an investment.

Industrial Dividend Stock No. 10: Pentair PLC (PNR)

Pentair is a diversified industrial company that operates in three fields: Water Quality, Flow & Filtration and Technical Solutions. The company, which is valued at $8 billion, has raised its dividend for more than 40 years in a row, making it one of the Dividend Aristocrats. The Dividend Aristocrats are a select group of 53 stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases. You can download an Excel spreadsheet of all 53 (with metrics that matter) by clicking the link below:

Pentair was recently split, as nVent Electric was a part of Pentair until spring 2018.

Pentair produced a solid earnings growth rate of about 6% since 2008. For fiscal year 2018 Pentair forecasts earnings-per-share of $4.00 (before the spin-off of nVent Electric), which would mean an increase of 13% from the prior year’s level.

Pentair has already started the year positively, achieving earnings growth of more than 30% on operating income growth of 13%.

Source: Pentair Investor Presentation

Pentair split with nVent Electric in April, going forward profitability will thus be lower. Analysts are forecasting earnings-per-share of $2.30 for the current year right now, as the impact of nVent Electric is backed out. Based on a share price of $44 shares are changing hands at 19 times this year’s earnings right now, which is relatively in line with the historic valuation.

Pentair has strong fundamentals, which include a low debt to asset ratio and solid interest coverage, and Pentair has high-quality, experienced management that has guided the company through the decades very successfully.

We estimate that Pentair will grow relatively in line with its historic growth rate over the coming years, which is by far not the highest growth of the companies in this report, but a mid-single digits growth rate is not bad, either. Our estimate for total returns over the coming five years is about 8% — 6% from earnings growth, 1.5% from the company’s dividend payments and a small benefit from possible multiple expansion.

Industrial Dividend Stock No. 9: ABM Industries (ABM)

ABM Industries is a company that provides facility solutions such as janitorial services, electrical & lighting, HVAC and medical, landscape & turf, parking, facilities engineering. ABM Industries owns a wide network of more than 350 offices across the U.S. and Canada and employs more than 130,000 people.

ABM Industries produced very strong growth in the most recent quarter, increasing its revenues by 20% year over year (to $1.58 billion), although its profits per share declined from $0.49 to $0.47 over the last year. The acquisition of GCA Services Group, which closed in September 2017, was a key factor for revenue growth, organic revenues would have been up by 3% during the most recent quarter.

Source: ABM Industries’ Investor Presentation

ABM Industries has been very consistently producing positive earnings growth, as the last year with negative earnings growth was 2003 – even during the last financial crisis, ABM Industries managed to increase its profitability. The industry ABM Industries is active in is not a high-growth industry, though, which is why the past earnings growth rate was in the mid-single digits only.

ABM Industries’ fundamentals have gotten a bit worse over the last decade, primarily its leverage (liabilities to assets) has been increasing. Management has stated that savings from the Tax Cuts and Jobs Act will be used towards reducing leverage going forward, which should also help improve the company’s interest coverage ratio. ABM Industries is well positioned versus competitors thanks to its size and scale, and the company has strong relationships with customers that include Google, Facebook, United Airlines, and more.

Going forward we see total returns of about 10% to 11% a year, based on 6% annual earnings-per-share growth, a 2.4% dividend yield, and valuation upside (shares trade at just 15 times this year’s earnings) that could add about 2% a year to the company’s total returns.

Industrial Dividend Stock No. 8: Johnson Controls International PLC (JCI)

Johnson Controls is an industrial company that has established itself in two segments: Buildings, which includes cooling, heating, ventilation and security, and Energy, which includes storage solutions and batteries. Johnson Controls, which is headquartered in Ireland (after a reverse takeover by Tyco), is valued at $32 billion.

Johnson Controls has recorded solid earnings growth in the past, but due to portfolio changes (several business units were spun off [e.g. Adient (ADNT)] or sold) its profitability right now is lower than it was a couple of years ago.

Due to a positive environment for its businesses across the globe Johnson Controls has been able to record positive growth in recent quarters.

 

Source: Johnson Controls Investor Presentation

During the second quarter, Johnson Controls’ earnings-per-share and revenue grew by 6% and 3% year over year, respectively, and they are forecasted to continue to grow through 2018. Building activity is strong in the US as well as in other major markets such as China and the rest of the Asia-Pacific region, Johnson Controls should, therefore, be able to benefit from that trend over the coming years, as its Building unit should continue to grow its revenues and earnings.

The outlook for the Power segment is not bad either, but not as positive as that for the Building segment, and Johnson Controls is looking at strategic alternatives such as a spin-off or sale of the Power segment (which would mean that the company would focus on the more attractive, higher-growth Building market).

Johnson Controls’ fundamentals are solid, the company has managed to lower its liabilities (relative to all assets) during the last decade. Thanks to a relatively low dividend payout ratio of less than 40% Johnson Controls’ dividend will most likely continue to grow at an attractive pace.

With earnings per share growth of about 5%, a multiple expansion tailwind of about 3% annually, and with a dividend that yields 3%, Johnson Controls should be able to return about 11% annually going forward.

Industrial Dividend Stock No. 7: Kansas City Southern (KSU)

Kansas City Southern is one of the biggest railroad companies in North America. The company, which was founded in 1887, is valued at $11 billion, and focuses on the North-South corridor, connecting cities in the central US with cities in Mexico.

 

Source: Kansas City Southern Investor Presentation

Kansas City Southern has a strong growth outlook throughout 2018 and beyond, based on positive volume trends, among other factors due to the opening of new car factories in Mexico that will mean increased volumes of vehicles that need to be transported to the US. Higher traffic should be positive for Kansas City Southern’s margins, as fixed cost digression will lead to expanding operating profits. Tax rate changes will also be a factor in 2018, which is why Kansas City Southern is expected to grow its EPS by almost 20% this year.

Kansas City Southern has solid fundamentals and has managed to lower its debt levels considerably over the last decade while also growing its interest coverage ratio. This should be a positive in a rising rates environment and increases the company’s financial scope. The fact that its industry is not overly competitive and that there are high barriers versus new market entrants is a positive as well.

Growth will slow down to a high single digits pace starting in 2019, but in combination with a relatively inexpensive valuation that should allow for multiple expansion (2% annual tailwind) and its dividend that yields 1.3% right now (and that can easily be grown, due to the payout ratio being just 23%) Kansas City Southern should still be able to provide total returns of roughly 12% annually going forward.

Industrial Dividend Stock No. 6: General Electric (GE)

General Electric is one of the biggest industrial companies in the world, trading at a market capitalization of $120 billion. It is a very well-known stock that has had a rough year, over the last twelve months shares dropped by 52%.

There have been several factors for this weak performance, including struggles in GE’s Power segment and account issues that required changes to its results from 2016 and 2017. With shares trading at a quite low level and turnaround efforts in place, General Electric could still provide quite compelling returns over the coming years.

 

Source: General Electric Investor Relations

General Electric is focused on bringing down its expenses, therefore making the company more competitive and increasing its margins in the industrial business at the same time. Problems in the Power segment are a headwind, but as almost 80% of operating profits are earned from the Aviation and the Healthcare units, where the outlook is a lot more positive, declining revenues from the Power segment will not derail the company as a whole.

General Electric is relatively highly leveraged, but has been lowering its leverage over the last couple of years and will continue to do so. After two dividend cuts its payout ratio is now below 50%, which means that significant amounts of money are available for repositioning the company as well as for paying down debt.

Sure Analysis forecasts that General Electric will be able to grow its earnings at a mid-single digits pace beyond 2018, coupled with tailwinds from multiple expansion of 3.5% a year (shares trade at less than 14 times this year’s earnings) and a dividend that yields 3.5% shares of General Electric could return about 12% annually over the coming five years.

Industrial Dividend Stock No. 5: Cummins (CMI)

Cummins is an industrial company that is focused on manufacturing diesel and natural gas engines for light-duty to heavy trucks. It also offers hybrid and electric platforms, those are less important for the company right now, though. Cummins is one of the leaders in its industry and well diversified geographically, it has employees in more than 160 different countries.

Recent results by the company were very strong, the company saw growth across all of its business units:

 

Source: Cummins Earnings Presentation

Demand for trucks (and thus also for truck engines) is forecasted to be strong over the foreseeable future, which poises well for Cummins’ results in the near future. Due to rising sales Cummins will also be able to increase its margins, and thanks to strong cash generation Cummins is able to return a lot of money to its owners via dividends and share repurchases whilst not neglecting investments into research and development to stay competitive.

Even though demand for Cummins’ products is relatively cyclical, the company did not cut its dividend during the last financial crisis, and its balance sheet remain healthy with a liabilities to assets ratio of ~50% and a very strong interest coverage ratio (34 during 2017).

Shares of Cummins trade at an inexpensive valuation of 13 times this year’s earnings, but due to the cyclicality of its business, Cummins never traded at an especially high valuation.

The small current discount (relative to the historic average) still means that shares will see a tailwind of ~1% annually from an expanding valuation, coupled with earnings growth (we forecast ~8% annually) and its dividend that currently yields 3.0%, Cummins shares should provide total returns of about 12% annually over the coming five years.

Industrial Dividend Stock No. 4: Snap-On (SNA)

Snap-On Tools was founded almost 100 years ago and since grown into a full-service, global distributor of a huge array of specialty and common tools. The company has a market capitalization of $8.5 billion.

The company has successfully grown in the market it addresses through the decades, and growth remains quite solid:

 

Source: Snap-On investor presentation

Through revenue as well as margin increases Snap-On has increased its earnings-per-share by 150% through the last decade, and shareholders do not only participate through rising share prices, but also through steadily rising dividends.

Snap-On is growing its business organically while also making acquisitions regularly, which has turned out to be an opportune strategy as this improves the company’s scale and allows Snap-On to expand into new markets, which has, over the years, made Snap-On the market leader in its industry.

Fundamentals for Snap-On look strong, the company is not highly leveraged (its debt to assets ratio is ~40% and has been declining throughout the last decade), its interest coverage is high and its dividend payout ratio is lower than 30%. This is positive news for shareholders, especially since management is committed to turning Snap-On into a premier dividend growth stock. We forecast that dividends will continue to grow at double digits, which is easily possible thanks to a solid earnings growth outlook and the low payout ratio.

Despite a strong growth track record and other positives, Snap-On is not trading at a high valuation at all, the discount to its historic average should add about 3% to total returns going forward. Coupled with a dividend yield of 2.1% and our earnings-per-share estimate of ~8% annually, Snap-On should be able to deliver total returns of roughly 13% annually over the coming five years.

Industrial Dividend Stock No. 3: Southwest Airlines (LUV)

Southwest Airlines is the only airline stock in this article, but it fits as the company, which is valued at $29 billion, making it the second biggest airline in the US, has a very compelling total return outlook.

Southwest Airlines has produced strong growth over the last decade, growing its earnings-per-share by 27% annually since 2008. Earnings-per-share for 2018 are forecasted to hit $4.50, with tax reform being a key factor for higher profitability. The company’s growth outlook remains solid beyond 2018, as passenger counts are poised to rise thanks to the opening of new routes (Southwest Airlines will, for example, start selling tickets for service to Hawaii in 2018).

Southwest Airlines could also expand its international business, as the company is currently focused on domestic flights in the US. The US market as a whole will continue to grow as well:

 

Source: FAA Aerospace Forecast

Southwest Airlines has been paying down debt over the last decade, and due to a low amount of interest-bearing liabilities on its balance sheet its interest coverage is very strong (110 in 2017). The company’s dividend payout ratio is quite low as well (13%), but the company’s dividend yield is not high, either, at just 1.3%.

Shares of Southwest Airlines trade at a discount to the historic average, which is one factor for the company’s high expected total returns over the coming years: With a multiple expansion tailwind of 5% a year, expected EPS growth of 8% annually, and adding in the dividend yielding 1.3% we get to a total return estimate of about 14% a year through 2023.

Industrial Dividend Stock No. 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.

 

Source: HNI 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 US and high confidence by business owners poises well for HNI’s office furniture operations, as small business and corporations are increasingly likely to spend money on renovations/renewals in times when the economy is doing well.

At the same time, HNI’s hearth products benefit from the tailwind of rising housing starts, which leads to rising demand for the products HNI offers. Remodeling activity in the US is rising as well, which is also a positive for hearth products demand, and which can be explained by rising disposable incomes and low unemployment.

HNI’s fundamentals look solid, despite the fact that its debt to assets ratio is a bit on the high side (63%), its interest coverage looks strong. Shares are valued at a relatively inexpensive valuation right now (less than 15 times this year’s earnings), which is one of the factors for high expected total returns: Sure Analysis sees a multiple expansion tailwind of roughly 6% a year, earnings growth of ~6%, coupled with the dividend, which currently yields 3.2% (its payout ratio is about 50%), this should mean total returns of about 15% annually over the coming years.

Industrial Dividend Stock No. 1: Macquarie Infrastructure (MIC)

Macquarie Infrastructure is not a well-known company, as it is one consumers usually don’t get in contact with, and at the same time, the company is not overly large, being valued at $3.4 billion. Macquarie Infrastructure owns infrastructure businesses such as airport services, gas production & distribution businesses, bulk liquid terminals, and more.

 

Source: Macquarie Infrastructure Earnings Presentation

Macquarie Infrastructure produces strong cash flows (significantly higher than its earnings, due to non-cash expenses such as depreciation), with which Macquarie Infrastructure finances a dividend that currently yields nearly 10%.
The company’s dividend had been even higher until late 2017, when Macquarie cut its payout, which made share prices drop by ~40%, which is one of the reasons why shares are currently so inexpensive: Based on estimates for the current year shares are trading at just above six times this year’s cash flows.

Macquarie Infrastructure’s business units, primarily Atlantic Aviation (airport services such as fueling, baggage services, etc.) and IMTT (bulk liquid products storage) are not active in high-growth industries, but Macquarie Infrastructure operates businesses that provide necessary services for our modern way of life, thus there is little risk of those businesses getting into trouble.

The low valuation, high dividend yield, and a small growth rate are enough to provide attractive total returns going forward: Sure Analysis sees a 5% annual benefit from multiple expansion (towards a price to cash flow multiple of 8, more in line with the historic average) and a 2% annual growth rate – when we add the 10% dividend yield we get to annual total returns of about 17% over the coming years.