Dividend-paying stocks could come under pressure as there is a sector rotation underway. High yielding sectors such as utilities, consumer staples, and telecommunication services, the darlings of the market in 2011, have been among the worst performers of 2012 as a strengthening domestic economy encourages investors to shift assets from defensive into more cyclical sectors. One of the sectors moving up is the industrial machinery industry. Year to date, the machinery industry is up 20% while utilities are down 4% and telecommunication services down 2%. There are still some bargain dividend growers in the machinery industry despite its recent run up in prices.
As the business improves for cyclical sectors, the earnings will increase which will in time increase the stock prices. This is the expansionary of price due to improving earnings. For the machine industry, most of the growth will come from emerging markets as they are developing their infrastructure. This is why there are bargain stocks to jump on the cyclical change.
- Cummins Inc. (CMI) designs, manufactures, distributes, and services diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide. It operates in four segments: Engine, Power Generation, Components, and Distribution. CMI is trading at $122 with a dividend yield of 1.3%. CMI goes ex-dividend on February 22 2012 for $0.40. CMI has set a new 52-week stock price high but still has a PEG ratio of 0.75. CMI has a 5-year average dividend growth rate of 35% making it a nice dividend grower through the coming years.
- Dover Corporation (DOV) manufactures and sells industrial products and components, and consumables. The company operates in four segments: Industrial Products, Engineered Systems, Fluid Management, and Electronic Technologies. DOV had Q4 EPS of $1.07, vs. $0.90, exceeding the $1.05 estimate. Revenues increased 15%, with 6% being organic. Strength in its energy and industrial markets offset weakness in alternative energy and semiconductors. These market dynamics are expected to remain in place during much of the next 12 months. DOV is trading at $66.00 with a PEG ratio of 1.09. It has a dividend yield of 1.9% with a 12% dividend growth rate.
- Deere & Company (DE) provides products and services primarily for agriculture and forestry worldwide. Analysts remain positive in their Fiscal Year 12 (January) outlook, as strong farm income and a likely improvement in global construction markets are boosting equipment demand. DE recently pulled back to below the $84 level but has support near the $82 mark. DE has a 1.97% dividend yield with a dividend growth rate of 13% over the last five years.
- Eaton Corporation (ETN) operates as a power management company worldwide. ETN is looking to turn the corner as its business has been sluggish during 2011. ETN missed their Q4 EPS number. Sales rose 10%, driven by growth in hydraulics and trucking, but fell short of the forecast due mainly to softer global electrical volume. ETN believes the shortfall will be temporary, but still has uncertain global demand driven by Eurozone debt issues. ETN is trading at $50.00 with a dividend yield of 2.98%. ETN is still reasonably price with a PEG of 1.08. ETN reports earnings on February 24. If their news is positive, then it will be time to buy this stock.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.