"The key to making money in stocks is not to get scared out of them."
-- Peter Lynch
It sure does seem investors are scared. The Dow dropped more than 312 points after President Obama's re-election (though Europe was also a big reason). Even robust industries such as equipment manufacturing took a hit.
No worry. Not only do the macroeconomic conditions bode well for these manufacturers, but their dividends also make them strong, attractive companies. One company in particular will election-proof your portfolio and pay you presidential-sized returns.
A rising tide lifts all boats
Whoever you voted for, one thing is clear: There's almost no situation in which the U.S. won't have to spend on infrastructure. Whether the project is part of a federal plan or on a case-by-case basis, certain bridges will need repair and new roads will need to be built. In any case, equipment like Caterpillar's (NYS: CAT) Bobcat and Mine Safety Appliances' (NYS: MSA) hard hats are key to building out these projects.
When you consider domestic economics, equipment manufacturers are sure to deliver on their returns. On Sept. 13, Federal Reserve Chairman Ben Bernanke announced that low interest rates will persist well into the future. This means that these highly capital intensive companies can now borrow more and at cheaper rates. In turn, manufacturers can then go ahead and spend that money on capital expenditures needed to expand the business. So far, Cummins (NYS: CMI) has more than doubled its capital spending compared to three years ago, and Caterpillar saw its North American businesses rise 31%.
The "dividend" primary
Of course, there is no guarantee that we'll be on the positive end of the economic cycle tomorrow or by the next election. Wary investors can nonetheless benefit from the Fed's actions. As 10-year Treasury bonds are at 1.74%, you can do better by investing in the highest-yielding equipment manufacturer. Let's look at five of them to compare.
Right now, Eaton (NYS: ETN) and Mine Safety Appliances seem like the best dividend-yielding companies, with yields at 3.02% and 2.84%, respectively. We also see that Deere (NYS: DE) and Cummins'dividend yields are much lower than most.
However, the real story behind this graph is that dividend yields in and of themselves don't tell us much. Dividend yields fluctuate depending on a company's earnings (dividend yield = total dividends divided by company market value). Taking a step back, we see that equipment manufacturers have consistently met or increased dividends throughout the years.
Companies that have a history of increasing dividends are often "stronger" or more stable -- especially if they've done so over the past several years. Looking at the graph, it's easy to see why investors turn to equipment manufacturers -- their dividends never seem to decline! The spike in yield during 2008 was from shares selling off during the recession and companies maintaining their dividend.
Right now, Caterpillar seems like the best investment, but before we decide, there's one last metric.
Do earnings lie?
Not all dividend-yielding companies are equal -- some are better able to fund their dividend than others. A second way to tell if a business' dividend is sustainable is by looking at its free cash flow payout ratio. Though some investors like to focus on the earnings payout ratio, those numbers are not always reliable because the capital-intensive nature of this industry distorts earnings. Since free cash flow is harder to fake, you can be assured that it accurately measures dividend health.
Payout ratios below 80% suggest that a company has enough cash to fund and raise its dividend. Here's how the equipment manufacturing industry measures up to that standard.
Mine Safety Appliances
Sources: author's calculation, 10-Ks.
By this statistic alone, Cummins seems like a very attractive stock -- it can fund its dividend five times over in the course of a year. But don't forget that its dividend yield has hovered around 2% over the past five years. In that case, you might as well buy into the S&P 500 index! Historically, the fund has yielded a 2% dividend.
The Foolish bottom line
In the end, I think the best choice is still Caterpillar.
Though Caterpillar's dividend yield of 2.43% seems too "moderate" for some, its dividend has remained the biggest over the past five years. Surprisingly, Caterpillar has even increased the dividend and has increased its FCF payout ratio recently.
Moreover, I'm sure U.S. infrastructure problems and Fed actions will benefit the entire equipment manufacturing sector, meaning Caterpillar's future prospects are rich. Of course, the international market is important, too. From 2006 to 2011, its international revenues shot up from 47% to 66%. But will its international expansion continue or will slowing international growth be Caterpillar's downfall? To make sure you don't lose money, click here to access our new report that details opportunities and threats facing Caterpillar.
The article 1 Dividend for Democrats and Republicans originally appeared on Fool.com.
Fool contributor Kevin Chen has no positions in the stocks mentioned above. Follow him on Twitter at @k2chen. The Motley Fool owns shares of Cummins. Motley Fool newsletter services recommend Cummins and Mine Safety Appliances. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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