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3 Dividend Stocks You Can Safely Hold for Decades

By Lee Samaha – Dec 20, 2021 at 4:21AM

Key Points

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These are three very different companies, but they all have pathways to dividend growth.

The dividend yield ranges from around 2.5% for Watsco (WSO 1.57%) and ABB (ABB -1.89%) to 3.4% for 3M (MMM 0.14%), but that's about it in terms of similarity for these three businesses. Of course, the three stocks offer vastly different investment propositions, but their one thing in common is the potential to pay dividends for many years to come. Here's why.

Watsco: A consolidator in a growing market

The heating, ventilation, air conditioning, and refrigeration (HVACR) distributor is the leading player in a highly fragmented market. According to Watsco, the company's revenue is slightly more than the combined revenue of the second to fourth most significant players. It's a level of strength created by a "buy and build" acquisition strategy.

A person with a fan on them.

Watsco helps ensure residential customers' air conditioning is working adequately. Image source: Getty Images.

In a nutshell, Watsco is a highly acquisitive company that's consolidating a fragmented U.S. marketplace. Unfortunately, it's a double-edged business strategy. It makes perfect sense in a market on a long-term uptrend, but in a declining market, it's a recipe for disaster. Fortunately, it looks likely Watsco is firmly in the former.

Watsco generates 94% of its revenue from North America, with the rest coming from Latin America. It's primarily a residential HVAC equipment and parts distributor, and 54% of its revenue comes from residential HVAC equipment and only 14% from commercial HVAC equipment. The rest comes from parts and supplies (28%) and refrigeration (4%), with a skew toward the residential market. It's a relatively stable market, with 65% to 70% of revenue coming from the replacement market and only 10% to 15% from new housing.

Meanwhile, long-term underlying growth in the installed base of U.S. air conditioning units creates a growth opportunity for the company alongside the growth-through-acquisition opportunity. In addition, Watsco's dividend is well covered by its free cash flow generation, and the company has little debt.

All told, there's every chance Watsco will be able to increase its dividend for many years to come. 

ABB: A turnaround in progress

Whereas Watsco has a long track record of excellent execution, ABB is a company that has flattered to deceive in the past. There's no doubt that the company has some highly regarded businesses in attractive markets, such as automation, robotics, and motion control. Meanwhile, its electrification solutions make it a leading beneficiary trend toward electrification and digitization in the economy. If you will have technologies like renewable energy, electric vehicles, smart buildings and infrastructure, and digital factories in your business, you'll need to invest in electrification.

Connected smart buildings.

ABB's solutions are critical for connected buildings. Image source: Getty Images.

However, the company arguably has not taken full advantage of these assets in the past. That said, it's been all change since CEO Bjorn Rosengren took over in February 2020. ABB sold an 80.1% stake in its power grids business in 2020 for $11 billion. Meanwhile, Rosengren began his tenure by decentralizing the company's management structure and moving away from its matrix structure so more decisions take place on a localized basis rather than at the central office.

In addition, Rosengren has divested ABB's noncore mechanical power transmission business for $2.9 billion and plans to divest its power conversion business in 2022. Meanwhile, the turbocharging business will be spun off or sold in 2022, and management plans to list its e-mobility (chargers for electric vehicles) in 2022 as well.

Management plans to use the cash from the divestments to pay dividends, fund acquisitions, potentially make buybacks, and fund capital spending. In addition, as part of the transition to growth, research & development costs have been accelerated in growth areas such as robotics, e-mobility, and connected products.

Everything points to a company being radically restructured to focus on its core strengths. Management expects it to result in revenue growing at a 4% to 7% pace (excluding "transformational" acquisitions and divestments), with margin expansion along the way. As such, investors can expect many years of dividend increases to come.

3M: Far from perfect, but still a good value

If Watsco is a company with an excellent record of execution and ABB is a turnaround play starting to take advantage of its assets, 3M is somehow a mixture of the two. 3M used to have a premium market rating due to its history of generating margin expansion through investing heavily in research and development (around 5.5% to 6.5% of its revenue). This relatively high investment in developing products meant it created differentiated products that commanded pricing power and consequently high margins.

However, the company has stumbled with stagnating revenue growth and margin challenges in recent years.

MMM Operating Margin (TTM) Chart

Data by YCharts

Moreover, 2021 hasn't been a vintage year for the company

That said, the company still has a collection of highly regarded businesses across the industrial sector, and it generates huge amounts of free cash flow that easily covers its dividend payments.

MMM Free Cash Flow Per Share Chart

Data by YCharts

In addition, management is restructuring the company, and it has the financial power to take further corporate action in the way that ABB is doing and also make transformative acquisitions. Throw in a 3.4% dividend yield while you wait, and 3M has the potential to pay significant dividends to investors for decades to come.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns and recommends Watsco. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.

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