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Summary

  • For each S&P 500 industry sector, I will be taking a look at available companies to help determine the best stocks for income investors.
  • In determining the best stocks per industry, I will be examining both the dividend growth and dividend yields of the stocks.
  • Out of this group of Industrial Machinery & Materials stocks, I feel that Cummins is the best long term option for income investors.

Overview

In this series of articles, I will be identifying which stocks for various S&P industries are best suitable for income investors, based on dividend growth and yield. For Part 16, I will be taking a look at Industrial Machinery & Materials stocks. These stocks include:

  • Cummins (NYSE:CMI)
  • Danaher (NYSE:DHR)
  • Dover (NYSE:DOV)
  • Flowserve (NYSE:FLS)
  • Illinois Tool Works (NYSE:ITW)
  • Joy Global (NYSE:JOY)
  • W.W. Grainger (NYSE:GWW)

When ranking the dividend paying stocks by yield, the order is as follows:

  • Illinois Tool Works - 1.94%
  • Dover - 1.73%
  • W.W. Grainger - 1.66%
  • Cummins - 1.64%
  • Joy Global - 1.39%
  • Flowserve - 0.87%
  • Danaher - 0.51%

When ranking them by dividend growth over the past five years, the order is as follows:

  • Danahar - 566.70%
  • Cummins - 257.10%
  • W.W. Grainger - 134.80%
  • Flowserve - 77.78%
  • Dover - 44.23%
  • Illinois Tool Works - 35.48%
  • Joy Global - 14.29%

I think that Flowserve and Danaher are solid companies and actually pretty nice long term investments, but in terms of an income investment I can't recommend them as they are yielding less than 1%. Although Danaher, has seen the highest dividend growth over the past five years, it is due to a recent one-time increase earlier this year, so I have serious doubts the dividend will see any future significant increases for some time.

With a yield of just 1.39% and poor dividend growth over the past five years, I also don't believe Joy Global is a suitable income investment option.

So let's take a closer look at Illinois Tool Works, Dover, W.W. Grainger, and Cummins to see which is the best long term investment option for income investors.

Looking at the chart below, you can see that Cummins and W.W. Grainger have seen the best revenue growth over the past five years, while Illinois Tool Works has actually seen a decline in revenue.

ITW Revenue (<a href=

ITW Revenue ((NYSE:TTM)) data by YCharts

In terms of earnings, Cummins is once again has seen the best growth, while W.W. Grainger has seen the lowest growth.

ITW EPS Basic Chart

ITW EPS Basic (TTM) data by YCharts

When looking at trailing PE ratio, you can see that W.W. Grainger and Illinois Tool Works have the highest values, while Cummins and Dover have the lowest.

ITW PE Ratio Chart

ITW PE Ratio (TTM) data by YCharts

W.W. Grainger and Illinois Tool Works remain the most overvalued when looking at forward PE, while Cummins drops to the most attractive priced.

ITW PE Ratio (Forward) Chart

ITW PE Ratio (Forward) data by YCharts

The payout ratio of all four companies remains stable and well below 50% for each.

ITW Payout Ratio Chart

ITW Payout Ratio (TTM) data by YCharts

Conclusion

Although Illinois Tool Works does offer the highest yield, it also has seen the lowest dividend growth out of the four applicable stocks. Add in the facts that the company is also the only one that has seen revenue decline over the past five years, has the highest payout ratio, and the second highest trailing/forward PEs, I feel that it would be a poor choice for a long term investment compared to the other three companies.

I feel that Cummins is the best long term option out of the group. Its yield is very comparable to the other two stocks (Dover and W.W. Grainger) and Cummins has seen the highest revenue and earnings increases out of this group over the past five years. The same holds true when going back and looking at the past ten years as well. With the lowest forward PE value and the second to lowest payout ratio, I feel that Cummins is positioned well to return long term investors a ton of value in the coming years.

Looking at the chart below, you can see that while all four companies have outperformed the S&P 500 over the past ten years, Cummins has significantly performed better than any of them. I don't have any reason to assume that this trend will not continue for another ten or twenty years.

ITW Chart

ITW data by YCharts

I feel that W.W. Grainger and Dover are also strong long term investment options, but when focusing more on income, I feel that Cummins is the best option. It has seen significantly more dividend growth over not just the past five years, but also the past ten years.

ITW Dividend Chart

ITW Dividend data by YCharts

As always, I suggest individual investors perform their own research before making any investment decisions.

Source: The Best Dividend Growers, Part 16: Cummins