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Many investors, such as Warren Buffet, praise defensive investing. As Buffett’s mentor Benjamin Graham recommended, investing with a margin of safety can be highly valuable in especially inflationary environments.

Defensive investing in some sectors, like Industrials however, doesn’t usually provide the best returns in bull markets. As markets exit from the recession, it is not surprising to see that the risky Industrial stocks with low dividend yields benefit from the uptrend more than the Industrial stocks with high dividend yields do.

However, we believe investors should be cautious of the upcoming inflationary environment. Like Jim Rogers and Ray Dalio, we are concerned about the Fed’s inflationary monetary policy, and we think investors should pick defensive stocks with high dividend yields in order to protect themselves against inflation.

We compiled a list of top 30 US Industrial Stocks (the sector classifications are sourced from Finviz) by market cap and ranked them based on their 12-month dividend yields. The top and bottom halves and their performances are shown below:

HIGHER DIVIDEND YIELDS

Dividend Yield

YTD Return

52-week Return

Lockheed Martin

LMT

3.5%

14.15%

-3.43%

Waste Management Inc.

WM

3.3%

8.40%

16.50%

Raytheon Co.

RTN

3.2%

8.05%

-12.66%

Republic Services Inc.

RSG

2.5%

4.38%

6.65%

General Dynamics

GD

2.4%

2.07%

-4.61%

Illinois Tool Works

ITW

2.3%

9.93%

17.01%

Emerson Electric Co.

EMR

2.2%

5.63%

17.35%

3M Co.

MMM

2.2%

13.35%

12.95%

Eaton Corp.

ETN

2.2%

8.23%

45.38%

Boeing Co.

BA

2.1%

21.07%

11.13%

L-3 Communications

LLL

2.1%

14.70%

-12.55%

Honeywell International Inc.

HON

2.0%

15.44%

33.09%

Stanley Black & Decker

SWK

2.0%

12.11%

18.13%

Fastenal Co.

FAST

1.8%

13.34%

25.54%

IIT Corp.

ITT

1.7%

13.47%

6.47%

Average

10.95%

11.80%

LOWER DIVIDEND YIELDS

Dividend Yield

YTD Return

52-week Return

Dover Corp.

DOV

1.6%

16.87%

33.53%

Rockwell Automation

ROK

1.5%

23.58%

47.32%

Caterpillar Inc.

CAT

1.5%

21.33%

66.78%

Rockwell Collins

COL

1.5%

7.42%

-2.46%

Deere & Company

DE

1.3%

15.92%

63.75%

Goodrich Corp.

GR

1.3%

-0.95%

19.54%

Parker Hannifin Corp.

PH

1.2%

9.43%

38.34%

Cummins Inc.

CMI

0.8%

7.29%

61.28%

Fluor Corp.

FLR

0.7%

2.01%

28.05%

Joy Global Inc.

JOYG

0.7%

15.31%

65.67%

Leucadia National Corp.

LUK

0.6%

31.80%

54.15%

Amatek Inc.

AME

0.4%

17.22%

59.02%

Bucyrus International Inc.

BUCY

0.1%

2.30%

41.11%

Precision Castparts Corp.

PCP

0.1%

10.29%

17.28%

Stericycle Inc.

SRCL

0.0%

12.61%

59.66%

Average

12.83%

43.53%

In the last 52-week period, the average return of the high dividend yielding industrial stocks was 11.80%. The second group of 15 stocks with lower dividend yields performed much better in the same period as we expected, returning 43.53% on average. However, low dividend industrial stocks has been performing just slightly better than high dividend ones since the beginning of the year. The average YTD return of the first group was 10.95%, underperforming the average YTD return of the second group by less than 2 percentage points. The returns of the two groups are comparable this year. It seems now is a good time to switch to high dividend yielding industrial stocks.

We prefer high dividend stocks over low dividend stocks since the former is usually safer and provides better protection in down markets. Top five industrial stocks with the highest dividend yields are as follows:

1. Lockheed Martin (LMT): Lockheed Martin is an aerospace, defense, security and advanced technology company operating worldwide. LMT has a 3.5% dividend yield, being the highest dividend yielder among the large industrial stocks. LMT had a negative performance during the past 12 months and returned -3.43%. The stock performed better since the beginning of this year, returning 14.15%. The stock has a market cap of $27.35B and P/E Ratio of 9.77. LMT is also among Billionaire Jim Simmons’s long term stock picks. D.E. Shaw also had more than $100 Million in LMT at the end of 2010.

2. Waste Management Inc. (WM): Waste Management Inc. is an environmental services company providing waste management and comprehensive waste removal. WM has a 3.3% dividend yield and returned 16.50% to its investors during the past 12 months. WM recently traded at $39.47 and returned 8.40% year-to-date. The stock has a market cap of $18.72B and P/E ratio of 19.71. Boykin Curry’s Eagle Capital had more than $200m in WM at the end of December.

3. Raytheon Co. (RTN): Raytheon is a defense contractor and military equipment manufacturer operating worldwide. RTN has a 3.2% dividend yield, but lost 12.66% during the past 12 months. RTN performed better in 2011, returning 8.05%. The stock has a market cap of $17.45B and P/E ratio of 10.39. RTN is one of Gotham Capital’s top stock picks.

4. Republic Services Inc. (RSG): Republic Services Inc. is a waste management company operating in the United States and Puerto Rico. RSG recently traded at $31.90 and has a dividend yield of 2.5%. RSG returned 6.65% during the past 12 months, while it gained 4.38% since the beginning of the year. The stock has a market cap of $12.10B and P/E ratio of 20.46.

5. General Dynamics (GD): General Dynamics is a major US defense conglomerate. GD has a 2.4% dividend yield and traded at $73.59 recently. GD lost 4.61% during the past 12 months, while it returned 2.07% year-to-date. The stock has a market cap of $27.43B and P/E ratio of 10.81. GD is one of the stocks that hedge funds are bullish about.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Time to Rotate to High Yielding Industrials?