Industrial stocks are generally cyclical in nature, moving up and down with the broader economy. Many of these stocks have rock-solid businesses behind them, providing key inputs to other companies. This allows investors to collect well-supported dividends regardless of the business environment.
Right now, dividend investors on the verge of retirement might want to consider Raytheon (RTX -0.06%), A. O. Smith (AOS 0.38%), and, for the more aggressive out there, 3M (MMM 0.38%). Here's a quick look at each of these three industrial sector dividend stocks and why they might be solid purchases right now for investors nearing retirement.
1. Raytheon: Plenty of work to be done
In the first half of 2020, Raytheon and United Technologies completed their "merger of equals," creating a new powerhouse in the aerospace and defense sector. Since that point, the dividend increased from $0.475 per share to $0.55 per share. The two increases in the last two years came despite a volatile market, which speaks to the consistency of the newly formed business.
The key here, however, is that at the end of the third quarter Raytheon had a $168 billion backlog of work. That's spread across commercial aerospace (around $101 billion) and defense ($67 billion), and it provides a strong foundation for the company's future revenue and earnings.
While the 2.2% dividend yield isn't huge, it is well above the 1.6% you'd get from an S&P 500 index fund today. And the order backlog suggests that you don't have to worry too much about the company being unable to pay. Note, too, that Raytheon's book-to-bill ratio in the third quarter was 1.3, which means it signed more new contracts than it fulfilled. So the business, while impacted by things like inflation and economic cycles, still looks pretty strong.
2. A.O. Smith: Everybody wants it
The second industrial stock on this list is A. O. Smith, which offers investors a roughly 2% yield. While modest, it happens to be toward the high end of the company's yield range over the past decade. That suggests that the stock is relatively cheap today. What's most important here, though, is that the average annualized dividend increase over the past decade for this manufacturer has been a huge 20%. More recent increases have been smaller, but still very generous (in the high-single digits). Put simply, A. O. Smith has proven itself to be a reliable dividend grower, which helps to offset the impact of inflation on the dividend cash you collect from your broader portfolio.
Adding to the dividend allure, A. O. Smith has increased its dividend annually for over 25 years, putting it in the Dividend Aristocrat space. The big story here is that anyone with enough money wants to buy what this industrial company sells -- water heaters. In North America, which makes up around 70% of its business, replacement of old units is the key business driver. Take one cold shower and you'll likely head out to buy a new water heater. In emerging markets like China and India (around 30% of the business), people moving up the socioeconomic ladder are buying new water heaters as soon as they can. That's a trend that has driven the company's dividend growth and will likely keep doing so for years to come.
3. 3M: Taking a leap of faith
The last name up, 3M, has a great history behind it, but you'll need to have a strong stomach to jump in. It is not for risk-averse types, even though its 4.7% yield is high on an absolute basis and historically speaking. And while we're talking about the dividend, it's notable that the industrial giant has increased its payment annually for over 50 consecutive years, making it a super-elite Dividend King. It's also highly diversified, focused on innovation, and investment-grade rated.
The problem is that 3M is currently facing legal and environmental headwinds. The outcome of these problems is uncertain and could be negative in a very material way. So buying 3M today is a bet that it can navigate its product liability and environmental cleanup issues without having to resort to a dividend cut. If you look at Altria and Johnson & Johnson and the similar issues they survived, you can see that the dire headlines around 3M might not be as bad as they seem. But there's still no reliable way to tell what will happen to 3M, even though it has a strong balance sheet and a huge $70 billion or so market cap. Notably, the business is still performing reasonably well, all things considered, with organic sales up 2% in the third quarter.
Strong options for retirement dividends
While Raytheon and A. O. Smith won't likely wow you with big yields, they both offer above-market yields and the potential for ongoing dividend growth backed by strong businesses. If you are heading into retirement, dividend growth is just as important as a big yield. The generous yield on offer from 3M isn't for everyone, given that the yield is so high because of legal issues. However, it is likely the company muddles through the current headwinds -- and, if it does so with the dividend intact, more intrepid investors will look back and be glad they held their noses and jumped aboard today.
