There's nothing quite so exciting for me as watching a dividend check hit my brokerage account. (Yes, I should probably find a hobby.) I simply love the regularity of the return I'm getting on my hard-earned cash. But the key for me is trying to find reliable dividend stocks when they are unloved on Wall Street. I did just that with Nucor (NUE -0.26%) and Eaton (ETN 2.27%). Now I'm happily buying more and more as the years go by.
Buying when others are fearful
The first step in my search for a stock is usually looking at a list of companies that have increased their dividends for at least 10 years. Sometimes, as was the case with Eaton, I'll consider companies that have stopped increasing their dividends for a strategic reason. After I've identified that first list, I pare it down even further by looking for companies with historically high yields.
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My thought process here is that a company with a long history of annual dividend increases has a proven history of success behind it. Simply put, my first list is probably filled with good companies. Focusing on historically high yields gives me an indication that a stock is out of favor and I might be able to get a good value. All in, I'm looking to buy good companies at cheap prices.
When I initially acquired Nucor and Eaton, both had dividend yields that were north of 4%. Nucor's yield right now is 1.2%. Eaton's yield is 1.6%. Both companies have increased their dividends multiple times since I bought in and I'm sitting on material capital gains in both cases.
More than just a yield
But here's the thing: I'm not just buying a stock because it has a historically high yield. I pass over far more investment opportunities than I actually buy. The key is that I also have to like the business. In fact, I want to like it so much that I'd be willing to hold it "forever" and allow the dividends to reinvest. I expect Nucor and Eaton to pay dividends in August, which means I'll be buying more stock on autopilot. And I'm happy, perhaps even excited, to record that event on the dividend tracking spreadsheet I update at the end of every month.
So the question really is what sets Nucor and Eaton apart from other companies? There are different stories for each.
Nucor is one of the largest steel mills in North America. It uses electric arc furnaces, which are more flexible than blast furnaces, an older steel mill technology used by some of its key peers. That allows Nucor to more easily adjust production up and down along with the highly cyclical steel industry.
Management also has a long history of reinvesting in the business, with a particular focus on building out its higher-margin steel products division. And, on top of that, it makes use of profit sharing in its pay structure. It basically rewards its employees very well when times are good but pays them less during lean years. That gives Nucor a break on the salary line right when it needs it, but employees don't mind because the good years are often very, very good.
When you put all of this together, Nucor is probably one of the best-run steel mills in North America, if not the world. There's a reason that it has managed to reach Dividend King status despite the economic sensitivity of the steel industry.
Eaton is a bit different. The company has an over 100-year history of shifting and changing with the world around it. It started life focused on the auto industry but today is focused on electrical products. When I bought it, the dividend had stopped growing as management was working to digest its largest acquisition ever (Cooper Industries). Given the long history of successfully adjusting with the times, I was willing to give management the benefit of the doubt on the dividend for a few years.
Today, the company is expecting there to be 3 times the normal run rate of mega projects (more than $1 billion) in the world, which will drive growth for the next three to five years, if not longer. It is currently reviewing opportunities in its Americas electrical division valued at twice as much as the run rate in 2019. The future looks very bright right now. And the company has long since returned to dividend growth, with the most recent 6% hike coming in March.
I'm not selling, but I am still buying
At this point, nothing fundamental has changed at Nucor or Eaton since I bought them, except perhaps that they have become even better-run companies. So I have no plans to sell them. And while I wouldn't necessarily go out and buy a new position in either today because their yields are toward the low end of their historical ranges, I'm happy to watch my dividends get reinvested in companies that I think are well-run. The price doesn't matter, either, as I'm confident that I'm building a position in something that I want to own until I need the cash to live on in retirement.
