Although I'm a dividend-focused investor, I've reached a point where the yield is actually secondary to the business I'm buying. Sure, I want to maximize the dividend income I generate, but the quality of the company backing the payment is the real focus of my approach today. Which is why I'm planning to stick with core holdings like Nucor (NUE -1.08%), Realty Income (O 0.52%), and Eaton (ETN 1.90%) for the long term. Here's a look at each.
1. The best steel mill
I bought Nucor years ago when steelmakers were out of favor, which is exactly when I like to buy great companies. The yield when I bought it was well more than twice the 1.5% dividend yield Nucor is offering up today. While I'm happily sitting tight, I also realize that the stock is expensive right now. Most investors would probably be better off waiting for the next industry downturn in this highly cyclical space.
Image source: Getty Images.
That said, Nucor is an amazing company. Its portfolio of mills are all modern electric-arc furnaces. These are highly flexible steel mills that are, to simplify things, easier to ramp up and down with market demand. They also use scrap steel, making Nucor something of an environmental, social, and governance (ESG) play as well. (The company lays claim to being the largest recycler in North America.)
Within its highly diversified portfolio it has achieved leadership positions in a dozen industry segments. It also has a long history of investing in its business to support long-term growth, even during market downturns. And, despite the inherent volatility of the steel space, it has increased its dividend for 49 consecutive years, just one shy of making it a Dividend King.
That's the type of name you want to buy right (meaning when the yield is high) and hold on to for dear life.
2. Back in my portfolio
Years ago, I bought Realty Income and then sold it because the stock price had risen. I recognize now that the decision was a mistake, and it's one I won't repeat.
Realty Income is the largest net lease real estate investment trust (REIT) you can buy. Net lease properties are single-tenant assets for which the tenant is responsible for paying most of the operating costs. Any single property is high risk, but over a large enough portfolio, net lease assets are a safe and reliable property niche. Today Realty Income has a portfolio of over 11,000 properties spread across North America and Europe. The yield is a fairly modest at 4.5%, but that's actually a net benefit.
What I didn't pay enough attention to when I sold Realty Income was that a low yield actually ends up being a positive for the business. That's because REITs issue equity to help pay for acquisitions, and having a low cost of equity capital (the low yield is a rough proxy for that) lets it grow on the cheap. Add in the company's scale, and it can make deals that its peers wouldn't even contemplate -- like its recent agreement to buy the Encore Boston Harbor resort and casino for $1.7 billion. This REIT has the capacity to take down elephant-size deals, and the casino was just the start.
I keep saying that I sold this Dividend Aristocrat, which I did. And I didn't actually buy it again. Realty Income bought another REIT I owned, Vereit. But now that I'm back in Realty Income, I'm not selling just because the price is dear and the yield is thus low. In fact, I now see this as a net benefit.
3. From vehicles to electric to vehicles again
Like Nucor, I bought Eaton many years ago when it was out of favor. It's expensive today, and while I'm happy to hold it, I probably wouldn't buy it with a 2.1% yield. However, I'm not looking to sell it despite my paper gains. I'm just sitting back and letting the dividends reinvest. The history here is pretty telling.
Eaton was founded more than 100 years ago to build parts for trucks. It still has a vehicle business, but over time it has shifted and changed its portfolio with the times.
Today, the company is focused around power management in various forms. The big focus is on electricity (about 70% of sales), but it also has the aforementioned vehicle division and an aerospace operation. Efficient use of power is increasingly important, and Eaton has positioned itself to create value for customers and investors.
That's highlighted by its new e-Mobility division, which is tiny at just 2% or so of sales. Basically, it is looking to enter the hot electric vehicle space as a supplier. But it didn't go out and buy a company; it simply took assets it had in-house and pieced them together. Just a few years old, this new division already has contracts worth over $800 million lined up. Which shows just how well positioned Eaton is to serve the world's needs as it increasingly electrifies over time. A company with that kind of flexibility is the kind of company I want to own for the long term.
Timing matters
As I noted, I wouldn't be too excited to buy Nucor or Eaton today, as they are both kind of expensive. So timing my entry point was important in my decision to continue owning this trio, noting I've got plenty of house money to lose.
The key is that the businesses I own are the types of businesses I want to hold on to. Realty Income, meanwhile, is probably fairly priced right now, noting the inherent benefit of a low cost of capital. And while I didn't actually buy it this time around, I'm happy to sit tight with what I own because, again, the business is so well positioned.
