Please ensure Javascript is enabled for purposes of website accessibility

The 3 Safest Industrial Dividend Stocks Right Now

By Neha Chamaria – Oct 17, 2020 at 8:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These solid dividend-growth stocks are also among the most reliable during tough times.

Plenty of industrial companies pay a dividend, but not all dividends are safe. Think about it: As an income investor, would you rather own a stock that pays erratic dividends or has a dangerously high payout, or a stock that has consistently paid, even increased, dividends and can generate enough cash flows to cover its payout? The choice is obvious, and you'd be astounded to find how safe and reliable some top-notch industrial dividend stocks are.

A solid bet on automation

Honeywell (HON 0.61%) recently landed a spot in the Dow Jones Industrial Average (^DJI) when the index reshuffled to accommodate businesses that "better reflect the American economy." Honeywell's a great fit, with its products, software, and solutions serving diverse industries and sectors, including aerospace, chemicals, healthcare, manufacturing, and retail, to name a few.

Now you might think: "Many industrial companies are as diversified, so what's so special about Honeywell?" In one word, it's technology. How many industrial companies have built a quantum computer, solutions for smart buildings, radar systems for drones, and cybersecurity software while manufacturing everyday products like home heating and security systems and electronics? Blockchain, Internet of Things (IoT), artificial intelligence (AI) -- these are just some of the emerging technologies Honeywell uses to build solutions.

A robot arm pressing key on laptop keyboard. Icons representing industrial sectors are superimposed.

Image source: Getty Images.

This industry-technology hybrid makes Honeywell an alluring stock, more so when you consider the dividend. In 2019, Honeywell increased its dividend by double digits for the 10th consecutive year. 2020 being a relatively challenging year, Honeywell's latest dividend increase was a modest 3%, but it was also its 11th consecutive annual hike. That dividend growth has contributed a significant portion to shareholder returns in recent years. The stock currently yields 2%.

Honeywell's focus on automation could be a game changer. A marker research report from Fortune Business Insights predicts the global automation market will hit $326.14 billion by 2027, growing at a compound annual rate of 8.9% between 2019 and 2027. Honeywell has the financial clout and expertise to make the most of the opportunity.

A top-notch Dividend King

Stanley Black & Decker's (SWK 1.50%) journey from one hardware shop in 1843 to becoming the world's largest tools and storage maker, as well as a leading manufacturer of engineered fasteners and security systems, is nothing short of remarkable. Today, Stanley products have found their way into most homes, in the form of handheld tools, lawn mowers, security systems, and fasteners that secure stuff like electronic devices.

The COVID-19 pandemic may have hit Stanley's sales, but it has also lifted demand for do-it-yourself and home improvement tools and boosted e-commerce sales. Stanley is now expanding its e-commerce services into newer geographic regions even as it expects to realize $500 million in savings in 2020 under its recently initiated a $1 billion cost-reduction program.

That's a surefire step to protect Stanley's cash flows and dividends -- Stanley is a Dividend King, or among the handful of publicly listed companies that have increased dividends for at least 50 consecutive years. In July, Stanley increased its dividend for the 53rd consecutive year. The stock yields only 1.6%, but it has generated massive returns when you include dividends -- here's what they look like over the past couple of decades.

SWK Chart

SWK data by YCharts.

With management eyeing a big acquisition that could generate $3 billion-$4 billion in incremental revenue beginning in 2022, Stanley is one industrial dividend stock you might want to look into further.

Prioritizing dividends even during a recession

Forget Post-it Notes and Scotch tapes -- 3M (MMM 1.43%) is hitting headlines lately for its N95 respirator masks. But these are only a few of the 60,000 products 3M makes. It has a hugely diversified portfolio with well-known brands that are sold worldwide. And the stock is a Dividend King today, with an impeccable 62-year record of consecutive annual dividend increases.

The past couple of years weren't kind to 3M as macro factors like geopolitical tensions and tariffs hit its top line. Yet 3M didn't falter, and instead got down to restructuring and strengthening its financials. That's why 3M is able to protect its dividends even during a pandemic. "From a capital allocation perspective, our long-term strategy remains unchanged. Our first priority is to invest in our business; second, maintaining our dividend; and lastly, flexible deployment for [mergers and acquisitions] and share repurchases," said CFO Nick Gangestad during 3M's second-quarter earnings call.

A dividend that grows during a recession is, undeniably, among the safest.

It would take deep financial troubles for 3M to break its dividend streak -- a least-likely scenario given its diversity, brand image, and a rich history of prudent capital allocation. 3M's cash flows, though volatile, have trended north over the years and safely covered rising dividends.

I'm even more upbeat about 3M's prospects now that management is diverting resources to high-margin products in strong segments like healthcare. After divesting laggard drug delivery unit, 3M will now likely sell its food safety business. The portfolio churn should boost 3M's cash flows and dividends in coming years, making this 3.5%-yielding stock with a comfortable 65% payout a must-watch dividend stock in its sector.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.