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Forget Caterpillar Inc.: Here are 3 Better Dividend Stocks

By Travis Hoium - Apr 20, 2016 at 5:05PM

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Caterpillar's dividend may not be as safe as it appears, and these stocks are better buys.

Image source: Caterpillar.

Caterpillar (CAT 0.73%) has one of those initially attractive dividends in a business that's been around for a long time. But that doesn't mean that it's a safe dividend.

Below, you can see that Caterpillar's payout ratio, or the portion of earnings paid out as a dividend, has risen sharply over the past year. Weak demand in mining is hurting earnings, and there's no end in sight to that weak demand -- which means investors should look elsewhere for great dividend stocks.

CAT Chart

CAT data by YCharts

Emerson Electric
Caterpillar's business is suffering from a decline in mining demand, and I don't see a recovery in that business on the horizon. But electric components from Emerson Electric (EMR -1.27%), from automation to heating and cooling, aren't becoming less important to the economy long-term. And even with the decline in revenue recently, driven by falling oil prices, Emerson Electric is in a strong position to grow its core business long-term (after spinoffs).

The dividend yield of 3.5% and the payout have been increasing for 59 straight years as well, which is among the best on the market. Unless there's a falling need for companies automating manufacturing or installing climate-control solutions, this company is in good shape, and so is its dividend.

You may not have heard of Pentair (PNR -0.61%), but you've definitely used products it makes in one way or another. Pentair makes everything from food & beverage processing equipment to crop spraying equipment and industrial valves and controls. In short, it's an industrial supplier that helps make the things you consume everyday.

The acquisition of Tyco's flow control business gave a big boost to revenue and cash flow starting in 2013, as you can see below.

PNR Revenue (TTM) Chart

PNR Revenue (TTM) data by YCharts

The drop in demand from oil and gas companies has hurt demand of late, but the dividend is still intact. And with 40 consecutive years of increasing dividends and a yield of 2.4%, I think this is a stock to own for years to come. 

Image source: SunPower.

8point3 Energy Partners
As the energy industry has been shattered by falling oil and gas prices, the solar industry has been dragged down with it. Among the worst hurt have been yieldcos, the MLP-type entities formed recently to own renewable energy projects and pay cash flow out in the form of dividends. Despite being a conservatively run company with projects that have an average contract life of 21.3 years, 8point3 Energy Partners (CAFD) has been thrown out with the bathwater as well. 

The stock now yields 6.2%, and management says it has enough project pipeline to increase its dividend 10%-15% on an annual basis through 2017. And if the stock recovers to a level where issuing new shares may lead to accretive acquisitions, that dividend growth could continue for many years to come. 

While most energy and industrial dividends are reliant on commodity prices or economic growth, 8point3 Energy Partners has a rock solid dividend for decades relying only on the consistency of sunshine. And that's a resource that isn't going anywhere.

Better dividends than Caterpillar
Emerson Electric, Pentair, and 8point3 Energy Partners may not have higher dividend yields than Caterpillar, but they have more consistent businesses, and that's what makes their dividends better buys today. I don't see a recovery in commodity prices on the horizon, and with that outlook these are better dividends than Caterpillar today.

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Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
$205.65 (0.73%) $1.50
Emerson Electric Co. Stock Quote
Emerson Electric Co.
$83.89 (-1.27%) $-1.08
Pentair plc Stock Quote
Pentair plc
$48.81 (-0.61%) $0.30
8point3 Energy Partners LP Stock Quote
8point3 Energy Partners LP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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