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Many investors praise defensive investing. As Warren Buffett’s mentor Benjamin Graham recommended, investing with a margin of safety can be highly valuable in especially inflationary environments. On the other hand, defensive investing in some sectors like Industrials 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 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 and further declines in the market.

We compiled a list of the top 30 US industrial stocks. The sector classifications are sourced from Finviz and the market data are sourced from Fidelity) by market cap and ranked them based on their annualized dividend yields. The top and bottom halves and their performances are shown below.

HIGHER DIVIDEND YIELDS

Dividend Yield

YTD Return

52-Week Return

Waste Management Inc.

WM

4.52%

-16.98%

-9.86%

Lockheed Martin Corp.

LMT

4.21%

3.98%

-1.16%

Raytheon Co.

RTN

4.17%

-8.81%

-8.05%

Northorp Grumman Corp.

NOC

3.62%

-4.49%

5.65%

Eaton Corporation

ETN

3.24%

-15.68%

7.59%

Republic Services Inc.

RSG

3.16%

-8.99%

-14.97%

Emerson Electric Co.

EMR

3.00%

-18.55%

-6.50%

General Dynamics Corp.

GD

2.97%

-9.23%

2.36%

Illinois Tool Works Inc.

ITW

2.92%

-11.83%

4.80%

Honeywell International Inc.

HON

2.73%

-7.35%

13.50%

Boeing Co.

BA

2.66%

-2.25%

-7.33%

Stanley Black & Decker Inc.

SWK

2.64%

-6.08%

8.68%

Rockwell Automation Inc.

ROK

2.60%

-8.23%

19.13%

L-3 Communications Holdings

LLL

2.56%

0.86%

-3.78%

Dover Corp.

DOV

2.28%

-4.80%

14.01%

AVERAGE

-7.90%

1.60%

LOWER DIVIDEND YIELDS

Dividend Yield

YTD Return

52-Week Return

Parker Hannifin Corp.

PH

2.18%

-20.77%

6.92%

Deere & Company

DE

2.13%

-12.04%

9.03%

ITT Corporation

ITT

2.08%

-6.97%

5.42%

The Sherwin-Williams Co.

SHW

1.97%

-10.61%

7.13%

Caterpillar Inc.

CAT

1.91%

-3.13%

28.28%

Rockwell Collins Inc.

COL

1.87%

-11.45%

-11.48%

Cummins Inc.

CMI

1.72%

-14.91%

15.57%

Fastenal Co.

FAST

1.66%

6.04%

25.38%

Goodrich Corp.

GR

1.33%

-0.43%

17.31%

Fluor Corp.

FLR

0.92%

-17.31%

11.86%

Joy Global Inc.

JOYG

0.86%

-5.80%

35.55%

Ametek Inc.

AME

0.63%

-2.30%

27.64%

Textron Inc.

TXT

0.42%

-19.49%

-11.21%

Precision Castparts Corp.

PCP

0.08%

6.99%

18.87%

Stericycle Inc.

SRCL

0.00%

-3.56%

21.22%

AVERAGE

-7.72%

13.83%

In the last 52-week period, the top 30 industrial stocks returned 7.72%, outperforming the SPY by more than one percentage point. In this outperforming period, the average return of the high dividend yielding industrial stocks was only 1.60%. The second group of 15 stocks with lower dividend yields performed much better in the same period as we expected, returning 13.83% on average.

However, Industrial stocks performed poorly and lost -7.81% since the beginning of this year. In this period, the average YTD return of the 15 high dividend yielding Industrial stocks was -7.90% vs. -7.72% for the second group of 15 stocks. As the returns of the two groups are comparable in 2011, 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 generally provides better protection in down markets. Top 10 US industrial stocks with the highest dividend yields are as follows:

Waste Management Inc. is an environmental services company providing waste management and comprehensive waste removal. WM has a 4.52% dividend yield but lost 9.86% in the past 12 months. WM performed negatively since the beginning of this year, losing 16.98% year-to-date. The stock has a market cap of $14.57B and P/E Ratio of 15.51. Boykin Curry's Eagle Capital had more than $200 million in WM at the end of March.

Lockheed Martin Corp. is a large US company operating in aerospace, defense, security and advanced technology industries worldwide. LMT has a 4.21% dividend yield but lost 1.16% in the past 12 months. LMT performed better this year, gaining 3.98% year-to-date. The stock has a market cap of $24.69B and P/E Ratio of 9.76. Jean-Marie Eveillard holds more than $200 million of LMT. (Check out Eveillard’s favorite stocks.) John Shapiro, Ron Gutfleish and Michael Karsch are also among prominent LMT investors.

Raytheon Co. is a major US defence contractor and military equipment manufacturer operating worldwide. RTN has a 4.17% dividend yield but lost 8.05% in the past 12 months. RTN performed negatively since the beginning of this year, losing 8.81% year-to-date. The stock has a market cap of $15.31B and P/E Ratio of 8.06. Alex Roepers' Atlantic Investment has the largest RTN position among the funds we are tracking, holding more than $100M of the stock. Ric Dillon, Steven Richman and Cliff Asness are also among RTN investors.

Northorp Grumman Corp. is a global company operating in aerospace, defense technology and electronics industries worldwide. NOC has a 3.62% dividend yield and returned 5.65% in the past 12 months. NOC hasn’t performed well since the beginning of this year, losing 4.49% year-to-date. The stock has a market cap of $15.88B and P/E Ratio of 8.94. Eveillard’s First Eagle holds more than $50 million of NOC.

Eaton Corporation is a multinational company specialized in power management in electrical and industrial sectors. ETN has a 3.24% dividend yield and returned 7.59% in the past 12 months. ETN recently traded at $41.94 and lost 15.68% in 2011. The stock has a market cap of $15.51B and P/E Ratio of 13.38. Glenn Russell Dublin’s Highbridge Capital Management invested more than $125 million in ETN.

Republic Services Inc. is another large waste management services company on our list. RSG has a 3.16% dividend yield but lost 14.97% in the past 12 months. RSG performed slightly better this year, losing 8.99% year-to-date. The stock has a market cap of $10.47B and P/E Ratio of 22.07. Harris Associates holds the largest RSG position among the 300-plus funds we are tracking.

Emerson Electric Co. is a global conglomerate providing wide range of engineering and technology products and related services. EMR has a 3.00% dividend yield but lost 6.50% in the past 12 months. EMR performed poorly this year, losing 18.55% year-to-date. The stock has a market cap of $36.43B and P/E Ratio of 16.10. Ken Fisher holds more than $250 Million of EMR. (Check out Ken Fisher’s favorite stocks here.)

General Dynamics Corp. is a major US defense conglomerate. GD has a 2.97% dividend yield and returned 2.36% in the past 12 months. GD performed negatively since the beginning of this year, losing 9.2% year-to-date. The stock has a market cap of $22.87B and P/E Ratio of 8.98. James A. Star’s Longview Asset Management holds a massive $2.5 Billion of GD.

Illinois Tool Works Inc. is a US manufacturing company that provides industrial products and equipments worldwide. ITW has a 2.92% dividend yield and returned 4.80% in the past 12 months. ITW performed negatively since the beginning of this year, losing 11.83% year-to-date. The stock has a market cap of $23.25B and P/E Ratio of 12.27. Harris Associates holds the largest ITW position. Ric Dillon also invested more than $150 million in ITW.

Honeywell International Inc. is a US conglomerate providing aerospace systems, diversified technology products and related services. HON has a 2.73% dividend yield and gained 13.50% in the past 12 months. HON performed negatively since the beginning of this year, losing 7.35% year-to-date. The stock has a market cap of $38.10B and P/E Ratio of 15.12. Fisher had more than $300 million in HON at the end of March.

Source: Time to Switch to High Dividend Industrials?