Elections can bring big changes, since that's usually what's on the ballot. Because of that, there's always a lot of uncertainty leading up to election day as the outcome can set a new course for the country. That can make it harder to invest because some changes can impact business profitability and therefore companies' ability to pay dividends.
However, some dividend stocks should thrive no matter who wins the upcoming election. Topping that list are Nucor (NUE 1.59%), Brookfield Renewable (BEP -0.41%) (BEPC 1.03%), and Honeywell International (HON 1.31%). Here's why they look like the best dividend stocks to buy ahead of the election.
Building the U.S. infrastructure
Reuben Gregg Brewer (Nucor): One of the rare areas of consensus in the country today is the need to upgrade U.S. infrastructure. That could lead to big construction projects no matter who is in the White House come January 2021. And if you are building anything material in this country, Nucor, the largest and most diversified steel maker in the United States, is likely to be on the supplier shortlist.
From an investment perspective, Nucor has a 47-year history of annual dividend increases and currently offers a fairly generous 3.3% yield (compared to the sub-2% yield you'll get from an S&P 500 Index fund). With a modest financial debt-to-equity ratio of 0.4 times and interest coverage of about 7.5 times, the balance sheet backing that payment is rock solid. Meanwhile, Nucor's modern electric arc mini-mills provide it the ability to more easily ramp up and down with demand than older blast furnace technology.
To be fair, Nucor's stock, using dividend yield as a rough gauge of valuation, isn't exactly cheap. In fact, the yield is middle of the road over the past decade or so. But paying a fair price for a great company is usually a good call, and Nucor is in the midst of a sizable capital spending plan that should help boost growth over the next couple of years. In fact, even if there isn't an infrastructure boom, Nucor should still do pretty well.
High-powered dividend growth no matter who wins in November
Matt DiLallo (Brookfield Renewable): Renewable energy giant Brookfield Renewable has enriched dividend investors over the years. Since 2000, the company has increased its payout at a 6% compound annual growth rate and currently yields a well-above-average 3.6%. That payout is on one of the firmest foundations in the energy sector thanks to Brookfield's top-notch balance sheet and contractually-secured cash flows.
What stands out about that payout is that Brookfield has plenty of power to keep growing it no matter who wins the election. Thanks to a trio of organic growth drivers, Brookfield has increasing visibility into what lies ahead, expecting to expand its cash flow at a 6% to 11% annual rate during the next president's term. One factor powering that outlook is its increasingly bright solar development program. On top of that, Brookfield believes it can make several billion dollars of acquisitions during that time, which could add another 4% to 5% annual jolt to its bottom line. Because of that, the company expects to have plenty of power to deliver on its plan to grow its high-yielding payout by 5% to 9% per year.
While a more green-energy-friendly Biden administration could enable Brookfield Renewable to deliver higher-end growth, it has plenty of power to keep thriving if Donald Trump wins reelection. Because of that, it's one of the best dividend stocks to buy ahead of the election, since it will win no matter who sits in the White House over the next four years.
A reflection of the modern economy
Daniel Foelber (Honeywell International): Over the past 20 years, Honeywell has emerged as an industrial giant with a diverse business model capable of thriving no matter who is in the Oval Office. Since bottoming in late March at the height of the COVID-19 pandemic, Honeywell has rocketed up nearly 70% and is now within striking distance of a new all-time high.
Like other industrial stocks, Honeywell is susceptible to market cycles, but its long-term success more than makes up for short-term volatility. During the second quarter, which was one of the most challenging quarters for industrials, Honeywell reported 19% lower revenue and $1.3 billion in free cash flow (FCF) compared to $1.5 billion during the same period last year.
Honeywell's FCF provides the foundation for the company's sustainable and growing dividend. Its dividend payment has more than doubled over the past 10 years but remains well within the bounds of what its FCF can handle.
Honeywell can then use its extra cash to pay down debt and preserve its healthy balance sheet. Despite being the third-largest U.S. industrial stock by market capitalization, Honeywell has the smallest net debt position of any of the 10 largest U.S. industrial stocks.
The company's investments in aerospace, the construction real estate industry, oil and gas, and more make it representative of the broader economy. Its technical focus through Honeywell Forge, a data collection and management system, combined with its diverse portfolio is one reason the stock replaced Raytheon Technologies as one of the newest members in the Dow Jones Industrial Average. Honeywell yields 2.2% at the time of this writing.