A brief overview of the industrials sector

The industrials sector covers a wide range of companies that produce goods for manufacturing, construction and resource extraction, such as equipment and machinery. The overall performance of the sector is correlated to the supply and demand for the manufacturing of specific products usually interwoven with general trends of growth or rescission in the markets. Some major stock names in fact operate in the industrials sector, including 3M, General Electric, and Union Pacific. The performance of the Dow Jones Industrial Average, and index that tracks 30 blue chip stocks primarily from the industrials sector, is considered by many investors a good indicator of the overall growth of the economy. Among the companies in the industrials sector, more than 7001 offer dividends to their shareholders.

Pros: diversification

A major advantage of large companies operating in the industrials sector is the diversified nature of the products they create, functioning as conglomerates that target buyers in many sub-sectors. Even in a period of rescission and reduced economic activity, at least one of the fields within which a conglomerate operates will exhibit growth, mitigating to an extent the negative impact of the stagnation in the rest of the sectors. Subsequently, the breadth of the area of operation of major industrials companies provides stability and assures the company is not susceptible to events that may adversely affect one specific sector.

Table 1: dividend yield and revenue structure of major industrials companies

Cons: diversification, again

Having established the pivotal role that a wide range of activity plays for conglomerates it is worth noting that this same feature can also hinder the quick overall growth of a company in the industrials sector if market conditions are favourable for one of its sub- sectors. As has been explained, diversification means that loss in once area of operation of a company will not have a massive impact on the overall performance of the company and will, subsequently, be unlikely to destabilise its growth – and its dividend performance. Nonetheless, this also means that the impact of favourable market conditions for one particular sector will be moderated by the performance of the company in other areas; one cannot expect the overall performance of a conglomerate to skyrocket following improved performance in one out of its many areas of operation, while the same would be expected, for example, from a growth stock operating solely in that specific area.

This feature is one of the factors that explain why while high performing companies in other sectors may in some cases reach dividend yields of around 6% (for example TFS Finance with a forward dividend yield of 6.04% or Southern Copper Corp with a 6.34%) or even yields of almost 9% (see New Residential Investment Corporation with a forward yield of 8.98% or AGNC Investment Corporation with 8.88%), the most successful industrials companies usually offer at most a dividend yield of just over 3% – a good dividend yield for a stock is considered to be around 2% – 6%2

This can be better understood through looking at the dividend information of major corporations in the field.

Table 2: Average Dividend Yield by Sector3

Overall, the industrials sector can offer an ideal investment opportunity for investors seeking a low risk, low (but stable and gradually increasing) reward investment, that can secure a source of passive income.

Aida Marinaki, King’s College London


References 

  1. The Complete List Of All 747 Dividend-Paying Industrial Stocks, Sure Dividend https://www.suredividend.com/industrial-stocks-list/
  2. What Is a Good Dividend Yield?, Mark Henricks, Yahoo Finance https://finance.yahoo.com/news/good-dividend-yield-180848940.html
  3. data source: Comparing Average Dividend Yield by Sector, Shauna O’Brien, Dividend.com  https://www.dividend.com/how-to-invest/comparing-dividend-stock-sectors-by-yield/

Leave a Reply

%d bloggers like this: