Dividend investors looking to create a long-term income stream have to find a balance between dividend yield and dividend safety. It's not an easy task, as the recent dividend troubles at General Electric highlight. Once an iconic dividend stock, it has basically blown a hole in many dividend portfolios. If you are feeling that pain, or just looking for a good dividend stock to add in the industrial space, Eaton Corporation plc (ETN 3.40%), Genuine Parts Company (GPC +0.66%), and Emerson Electric Co. (EMR 2.72%) should all be on your watchlist.
1. Conserving energy
Eaton Corp is a globally diversified industrial company that is focused on helping its customers make the most efficient use of energy. It has units that focus on the electrical space, aviation, vehicles, and hydraulics. The current yield is roughly 3.4%, well above the roughly 2% available from an S&P 500 index fund. Management has increased the dividend for nine consecutive years, a short record driven by the fact that it briefly paused dividend increases around a decade ago while it absorbed the largest acquisition it had ever made. The key, though, is that the company successfully navigated a massive corporate overhaul without cutting its dividend.
Finding a good dividend stock involves carefully balancing risk and reward. Image source: Getty Images.
Eaton's payout ratio has ranged between 30% and 50% over the past decade. Over that span, the dividend has grown at a compound annual rate of roughly 8%. That's nearly three times the historical growth rate of inflation, which is about 3%.
The company is performing quite well right now. Notably, Eaton upped its organic growth projections when it announced first-quarter earnings, and its once-troubled hydraulics division turned a corner last year and is now a source of strength. It is also building a new division to serve the electric vehicle market, with a target focus on trucks, which it thinks could generate up to $4 billion in revenue by 2030. Eaton's price-to-earnings ratio is roughly 11.5 compared to its five-year average of 16.5 and the broader industrial sector's 16.9. So, it looks relatively cheap today.
2. Distributing widgets with skill
Genuine Parts' largest division makes and sells automotive replacement parts. But the real strength of the company is its skill on the distribution front. It knows how to get vital parts to customers in a timely fashion, which helps explain why it has been able to expand into the industrial parts, office product, and electrical component spaces without skipping a beat. Its current yield is around 3.1%, backed by a dividend that has been increased for an incredible 62 consecutive years.
This manufacturing and distribution specialist has maintained a dividend payout ratio of between 50% and 65% over the past decade. It grew the dividend at an annualized rate of roughly 6.5% over that span.
ETN Payout Ratio (Annual) data by YCharts.
Genuine Parts has faced headwinds in a number of its business recently (notably increasing competition in auto parts and sluggish demand for office products), but it has been able to keep its top line heading generally higher while dealing with the issues it faces. The big takeaway from the current period, though, is that the company's dividend isn't at risk even if its stock gets pushed around by near-term concerns. The P/E is currently a little high, at 22 versus a five-year average of 20. But with such a long track record of success, income investors should still do a deep dive even if they decide to keep it on the watchlist while they wait for a better valuation.
3. Still shifting gears
Emerson Electric is probably the best-known name here. The industrial concern is focused on automation and commercial and residential solutions (think heating and air conditioning). Although it was recently rebuffed in an attempt to buy competitor Rockwell Automation, it has been successful at finding smaller, bolt-on deals with which to grow its business. The current yield is around 2.7%, with dividend increases in each of the last 61 years.
Over the past decade, the company has grown its dividend at around 6% annually. The company's payout ratio had been in the 40% to 50% range until it sold a division serving data centers in 2016 for $4 billion. The loss of the earnings associated with that business pushed the payout ratio into the 70% range and left the company's P/E at an elevated level. Following the sale, though, Emerson has clearly become more acquisitive (note the attempt to buy Rockwell) as it looks to build around its core and boost earnings.
ETN PE Ratio (TTM) data by YCharts.
Of the three here, Emerson is probably the most aggressive, but dividend investors should remember that it sold off a big chunk of its business without cutting the dividend. Although it looks relatively expensive today, partially because of that move, it's worth keeping on your watchlist as it builds back from a big corporate overhaul. In fact, the company upped its organic growth and earnings guidance earlier in the year, suggesting that it is well on its way to a lower payout ratio and even more dividend increases in the future. For more aggressive investors willing to look past this transition period, it might even be worth buying today.
One for today, two to watch?
Eaton Corp is a great dividend stock that appears relatively cheap today. If you're looking for an industrial dividend payer to buy now, it would be a good pick. Genuine Parts and Emerson both look a little expensive, but there are reasons for that. In Genuine Parts' case, a relatively high yield, a lengthy history of dividend increases, and a low-risk dividend might be worth the slightly elevated price as the company deals with some headwinds in its various business segments. Emerson, meanwhile, is working through a transition period following a big asset sale. But it hasn't skipped a beat on the dividend front as it works to build earnings back up -- a fact that might make it a buy for more aggressive investors as it rebuilds.
