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If You Like Dividends, You Should Love These 3 Stocks

By Scott Levine - Apr 6, 2018 at 7:02AM

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Besides your attention, these aristocrats will likely garner your affection.

Unlike Marlon Brando's character in On the Waterfront, there are numerous stocks that do have class. Members of the S&P 500, these stocks have raised their dividends for 25 consecutive years or more, thus earning the title Dividend Aristocrat.

Let's take a closer look at three of the stocks from this noteworthy group, which could make welcome additions to any investor's portfolio: Praxair ( LIN -0.81% ), Illinois Tool Works ( ITW -2.50% ), and Nucor ( NUE -5.18% ).

Written in skywriting, the word dividends is set in a partly cloudy sky.

Image source: Getty Images.

This company is a gas, gas, gas

An industry innovator, Praxair developed the first plant for extracting helium from natural gas in 1917. Nowadays, it deals in much more than helium; its primary businesses are in the manufacturing and distribution of process gases -- carbon dioxide, hydrogen, electronic gases, specialty gases, and acetylene -- and atmospheric gases: oxygen, nitrogen, argon, and rare gases. Process gases are required by a diverse range of businesses, from 3D printing to the food and beverage industry, so investors can rest assured that a slowdown in growth in any one industry will not have an overly deleterious effect on Praxair's business.

Praxair, over the past 25 years, has raised its dividend from an annualized $0.13 per share in 1993 to $3.30 per share in 2018. And the company's strong ability to generate free cash flow suggests that it will have the ability to continue returning cash to shareholders in the future. Representing 15.1% of its sales, the $1.73 billion in free cash flow that Praxair reported in 2017 was a company record. Dividend-minded investors should also appreciate management's circumspect approach to rewarding shareholders. Over the past 10 years, the company has averaged a 45.9% payout ratio, according to Morningstar.

From the Land of Lincoln

Founded more than 100 years ago, Illinois Tool Works brands itself on its website as one of the "world's leading diversified manufacturers of specialized industrial equipment, consumables, and related service businesses." Like Praxair, Illinois Tool Works services a wide range of industries, from providing zippers for resealable bags to aircraft ground support equipment. 

Proving successful in its endeavor to grow by eschewing acquisitions, the company reported organic growth of 2.9% in 2017 -- a notable increase over the negative 0.4% and positive 1.2% that it reported in 2015 and 2016, respectively. Looking ahead, management forecasts organic growth between 3% and 4% in 2018. The returning of more than $1.9 billion to shareholders through dividends and stock buybacks in 2017 is the most recent demonstration of Illinois Tool Works' long commitment to rewarding shareholders; the company has been growing its dividend for more than 50 years. And illustrating its ongoing commitment to returning cash to shareholders, management expects to grow EPS 8% to 10% from 2018 and 2022; moreover, in the shorter term, management plans to simultaneously increase its payout ratio from 42% in 2017 to about 50% in 2020.

A company to steal your heart

The largest producer of steel in the United States, Nucor also bears the distinction of being North America's largest recycler. Looking to maintain its position as a stalwart in steel production, Nucor is making several investments to advance its long-term growth strategy. For one, Nucor is planning an $85 million upgrade, which will reduce operating costs, to its rolling mill at Nucor Steel Marion. Secondly, by constructing a rebar micro mill in Missouri to supply the Midwest market, Nucor believes it will gain a sustained cost advantage over other domestic steel producers supplying rebar from outside the region; moreover, the company seeks to expand the Nucor Steel Kankakee bar mill in Illinois by constructing a merchant bar quality mill.

Although the company hasn't achieved the same financial success that it enjoyed before the Great Recession, Nucor seems to be over the hump. In 2017, the company reported $1.32 billion in net earnings -- more than double the average comparable earnings of $483.0 million that the company reported during the 2010 to 2016 time period.

Since its first distribution in 1973, Nucor has returned dividends to shareholders for 180 consecutive quarters, and over the past 10 years it has returned more than $5 billion to investors through dividends and share repurchases. Management aspires to continue rewarding shareholders without sacrificing the company's financial health, identifying a goal of returning a minimum of 40% of its annual earnings to stockholders through dividends and share repurchases.

Investor takeaway

Although all three companies provide compelling opportunities for investors interested in dividend stocks, Illinois Tool Works may be the most intriguing option. Praxair, for example, is in the process of merging with Linde, and it remains to be seen how, if at all, the merger will affect the company's dividend policy. In addition, Illinois Tool Works seems more attractive than Nucor, which is susceptible to downturns in the steel market. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Nucor Corporation Stock Quote
Nucor Corporation
NUE
$106.26 (-5.18%) $-5.81
Linde plc Stock Quote
Linde plc
LIN
$318.14 (-0.81%) $-2.60
Illinois Tool Works Inc. Stock Quote
Illinois Tool Works Inc.
ITW
$232.15 (-2.50%) $-5.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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