With a market capitalization of more than $4.2 trillion, industrials stocks comprise a significant share of the S&P 500 Index.
In this article, we explore the sector’s dividend contribution as well as its role in the broader economy.
Industrials Sector
Industrials are a category of stocks involved in the production of goods used in manufacturing, construction and distribution. As a vertical category, industrials represent one of the S&P 500’s 11 primary sectors alongside financials, industrials, information technology and others.
Although the S&P 500 splices industrials into 14 industries, Dividend.com uses a more granular breakdown to help investors evaluate stocks based on their average yield. This breakdown, along with company count and average industry dividend yield, is presented below.
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| Industry | Company Count | Industry Dividend Yield |
|---|---|---|
| Lumber, Wood Production | 10 | 6.79% |
| Cement | 6 | 2.04% |
| Waste Management | 9 | 1.91% |
| Metal Fabrication | 15 | 1.51% |
| Machine Tools & Accessories | 9 | 1.48% |
| Small Tools & Accessories | 7 | 1.46% |
| Residential Construction | 14 | 1.40% |
| Diversified Machinery | 33 | 1.31% |
| Industrial Electrical Equipment | 22 | 1.28% |
| Farm & Construction Machinery | 17 | 1.04% |
| Aerospace-Defense Products & Services | 22 | 0.95% |
| General Building Materials | 21 | 0.91% |
| Industrial Equipment & Components | 19 | 0.88% |
| Aerospace-Defense – Major Diversified | 5 | 0.87% |
| Heavy Construction | 11 | 0.73% |
| Pollution & Treatment Controls | 5 | 0.58% |
| General Contractors | 5 | 0.58% |
| Textile Industrial | 5 | 0.51% |
| Manufacturing Housing | 1 | 0.00% |
As the chart clearly shows, stocks in the lumber, woods production category boast the highest dividend yield at 6.79%. Cement is a distant second at 2.04%, followed by waste management (1.91%) and metal fabrication (1.51%). A majority of industries yield an average of less than 1%.
Industrials Stocks and Dividends
As a whole, industrials stocks have an average yield of 1.38%, based on the latest data. By comparison, the S&P 500 Index yields an average of 1.80% – a figure that has remained more or less steady since the fallout from the financial crisis. Based on year-end data, the S&P 500 Index has yielded between 1.94% and 2.11% over the past five years.
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Historically, industrials tend to underperform the wider market and periods where they do outperform are limited. For example, financials yield an average of 3.01%, utilities 2.28% and basic materials 2.28%. In fact, the average yield on industrials has declined in recent years and now sits well below the inflation rate. Looked at purely from the perspective of yield, the sector is generally ill equipped to act as a hedge against inflation.
Additionally, dividend stocks usually weaken when bond yields rise – a phenomenon that has been observed throughout much of 2018 (the yield on 10-year U.S. Treasuries has climbed above 3% on multiple occasions in anticipation of higher interest rates). As bond yields continue to rise, there’s reason to believe that industrials stocks will struggle to grow their dividends.
That said, there are several strong dividend players within the sector, including Emerson Electric (EMR ), which has grown its payout each year since 1957. Dover Corp (DOV ), Stanley Black & Decker (SWK ) and Illinois Tool Works (ITW ) are in a similar boat. Dow 30 blue chip Caterpillar (CAT ) has also emerged as a strong dividend play post-financial crisis.
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The Bottom Line
Industrials are an integral part of the U.S. and global economies and make an integral part of a well-balanced portfolio. However, with very few exceptions, they are not particularly known for their dividend prowess. Investors should therefore plan accordingly when diversifying into industrial goods.
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