General Electric (GE) is one of the most widely followed dividend stocks in the market, and for good reason. It's not the ultra-high yield. There are certainly many alternatives that pay more than the 3.16% annual dividend that GE offers. Rather, GE is a unique addition to any dividend portfolio because of its diversity. Creating a diverse portfolio should be one of the top goals of any income investor, and buying shares of GE is like buying several stocks in one. The unique, diverse makeup of GE's business makes it an excellent combination of yield and growth potential that deserves consideration for any well-rounded income portfolio. Let's take a closer look at GE's business and why they are an especially good value right now, even with shares just under their 52-week highs.
The many faces of GE
General Electric operates its business in 8 distinct segments, so let's take a look at each one and what it does.
The Power & Water segment of GE, which accounts for 19% of the company's sales, produces a wide variety of power generation equipment including turbines and generators, as well as water treatment solutions. While GE is the largest U.S.-based turbine manufacturer, in order to get this kind of exposure in your portfolio from another source, you would need to invest in a company like Jacobs Engineering (JEC).
Oil and Gas (10% of sales) produces drilling and production systems for oil and gas companies, as well as various equipment for use on floating platforms. Other drilling parts and services companies, such as Oceaneering (OII) could also bring this industry to your portfolio.
The Energy Management segment, at just 5% of sales, is a small but significant one, as it represents some of GE's original business lines. The segment's goal is to produce solutions that optimize the delivery of electrical power, similar to companies such as Phillips (PHG).
GE's Aviation segment (14% of sales) is one of the leading manufacturers of jet engines for use in all types of aircraft. The segment also produces replacement parts and derives a good percentage of its income from servicing existing engines. To get this kind of exposure, you would need to invest in another aviation leader, such as United Technologies (UTX).
GE has a large Healthcare segment (12% of sales) that produces magnetic imaging products, like computed tomography (CT) equipment. Another leading healthcare equipment maker could take the place of this segment in your portfolio, and Medtronic (MDT) is an excellent choice.
The Transportation segment is GE's smallest at only 4% of the company's sales, and produces diesel-electric locomotives in addition to a variety of other railway-related equipment. There are only a handful of large companies that produce similar products, and Caterpillar (CAT) is among the best-in-breed there.
The Home and Business segment is perhaps the segment that the public is most familiar with, although it accounts for just 5% of GE's total sales. This is the segment that produces GE's line of home appliances, such as refrigerators, washers and dryers, ranges, and more. Whirlpool (WHR) is another great name in this sector, and is an excellent company to invest in.
Last, but certainly not least is GE Capital, which accounts for more of the company's sales (31%) than any other segment. GE Capital includes all of GE's financial businesses, such as consumer lending, real estate, consumer finance, and several others. Over the past several years, GE Capital has been systematically disposing of some of its less desirable assets, and there is definitely some lingering risk from this segment. GE Capital can be replaced in a portfolio with almost any major banking company.
To sum it up…
Now, all of the other companies mentioned here are excellent investments on their own. My point is simply to show the incredible amount of diversity that GE brings to an income portfolio. Some of these business segments are relatively stable (Power & Water, Home & Business, Transportation), and others offer very nice growth potential in the years ahead (Healthcare and Aviation in particular). Also important when diversifying is the geographical diversity of a company's revenue. In GE's case, less than half of the company's revenue comes from the U.S., with substantial revenue streams from Europe (18%), Asia (17%), Central/South America (9%), and Africa & Middle East (8%).
So, while the company's 3.16% yield won't make you rich overnight, consider the diversity it adds to your portfolio and the growth potential, which implies the likelihood for further dividend increases in the future. Also consider that GE's payout ratio for this year is just 46% of expected earnings, meaning that the dividend is safe and secure and has room to grow with the company's earnings, which are expected to grow at an average rate of 11% over the next 3 years.