The Top Dividend Paying Stocks in America

Where can you find the top dividend paying stocks in the U.S. stock market today?

Personally, I like to start my search for new stocks to invest in by focusing on the strongest areas of economic growth. While overall GDP growth slowed down last quarter, many segments of the economy are very strong. For example:

  • GDP from construction has increased every quarter since the start of 2014.
  • Service sector GDP has risen consistently since 2009.
  • The manufacturing industry started growing again in the middle of last year, after a couple of years of stagnation.
  • And GDP from mining, which declined sharply in 2014 and 2015, suddenly perked up in the second quarter of 2016 and is still rising.

Looking for the top dividend paying stocks in each of these sectors, I came up with the following list of six.

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Here are my six favorite dividend stocks to invest in the American economy.

Home Depot (HD) is one of the top dividend paying stocks in America.Top Dividend Paying Stock #1: Home Depot (HD)

Home improvement retailer Home Depot is one of the most efficient, well-managed retailers in America. After struggling through the financial crisis and housing market crash, Home Depot’s management resolved to make sure the company was strong enough to survive next time something like that happened. Their efforts have improved operating margins from 6.1% in 2009 to 14.2% last year. At the same time, the U.S. housing and construction market is booming, and revenues and EPS have both risen consistently every year since 2010.

Despite these excellent results, HD spent most of 2016 consolidating. The stock finally broke through overhead resistance in February, and has been alternately hitting new highs and consolidating ever since. The company will report first-quarter results on Tuesday, May 16, and analysts are expecting 11% EPS growth and 4% revenue growth.

The HD dividend currently yields 2.3%.

NSTop Dividend Paying Stocks #2: Norfolk Southern (NSC)

Norfolk Southern is a railroad. The company’s network stretches from Florida to New York, and west to the Mississippi. The most common commodity carried on NSC’s tracks is coal from mines in the Appalachians.

Norfolk went through a rough patch in 2015; revenues and EPS slipped and the stock fell 30% from its 2014 high. After bottoming in January 2016, NSC started a slow but steady climb back to its former highs, finally breaking out to fresh ground early this year.

The company has beat estimates in each of the last three quarters, and over two dozen analysts have increased their earnings estimates for NSC in the past month. Average estimates now have Norfolk’s EPS rising 13% this year and 11% next year, while revenue growth is expected to stabilize in the mid-single digits.

The NSC dividend currently yields 2.1%.

CumminsTop Dividend Paying Stock #3: Cummins (CMI)

Cummins makes engines for trucks, busses and heavy-duty vehicles. About 58% of revenue comes from the U.S. and Canada. Demand for Cummins’ products is driven by the U.S. trucking industry and by global construction and industrial production (especially in China and India).

Revenues peaked in 2014, thanks to strong trucking activity in North America. But a global economic slowdown and the strengthening dollar delivered a big hit to sales in 2015, and Cummins missed estimates badly in the third and fourth quarters. Revenues and earnings both stopped growing and started declining. In 2016, international demand started to improve, but U.S. trucking slowed, and sales and earnings fell for a second year in a row.

The company shifted its focus to improving profitability, and managed to beat expectations in each quarter of 2016 despite continuing sales declines. Toward the end of the year, sales leveled off, and then Cummins reported first-quarter 2017 earnings that beat estimates by 30% last week. Revenue was expected to fall 3% but rose 7% instead. In light of the improvement, management has raised its 2017 revenue guidance from flat to 4%-to-7% revenue growth.

Cummins aims to return about half of its operating cash flow to shareholders, so the company continued to increase the dividend even as earnings shrank over the past couple years. That drove CMI’s payout ratio to 57% last year, quite a bit above its historical average of 23%. It’s now coming down as earnings start to rebound. Cummins has increased its dividend every year since 2010 and recent increases have averaged a generous 21%. Today, CMI yields about 2.6%.

DonaldsonTop Dividend Paying Stock #4: Donaldson Company (DCI)

Minneapolis-based Donaldson makes air filters used in transportation and industrial applications. Their industrial segment makes air filters for everything from hard drives to windmills, while the engine division makes filters for trucks, helicopters, planes, heavy-duty vehicles and more. Demand is closely tied to industrial production and economic growth.

Sales started to struggle in 2013, and the stock struggled through 2014. The next year brought a 27% decline in the stock price, and revenues and earnings continued to fall into 2016.

However, things are looking up for Donaldson. Sales are expected to rise 3% this year and 4% next year. Profits are expected to rise 9% and 11%. The company’s dividend payout ratio has already fallen back into the low 40s, after rising as high as 49% last year. (Though ideally, I’d like to see it get back to its historical average around 30%.) At current prices, DCI yields 1.5%.

CarnivalTop Dividend Paying Stock #5: Carnival (CCL)

In addition to the changes in the economy in recent years, we’ve seen some interesting changes in consumer spending patterns. Consumers are spending more of their disposable income on experiences—like travel and entertainment—and less on stuff. Travel spending in particular has grown faster than other spending, wages and GDP since the recession.

I think this is a great trend: travel is good for people and the world, and most of us already own too much stuff. It’s also good for Carnival, the largest cruise company in the world. The company’s 10 cruise lines include Carnival, Princess, Holland America and Cunard.

While the company’s ships cruise the world, CCL didn’t go much of anywhere for most of 2015 and 2016. Unfortunately, investors panic every time an epidemic, natural disaster or terrorist attack affects travel. But management understands that these unpredictable events are just part of doing business, and is laser-focused on improving efficiency so that earnings continue to grow regardless of the macro environment.

For example, Carnival still operates the same number of ships it did in 2011 (99), but carried 1.2 million more passengers last year. Management has raised occupancy through yield management and replaced aging ships with new, more efficient liners that can hold more passengers (and include new features like ice rinks and IMAX theaters).

As a result, operating margins have improved from 14.3% to 18.7% over the past five years. EPS have risen every year since 2013, and analyst estimates are moving up.

Most recently, CCL and peers Royal Caribbean (RCL) and Norwegian Cruise Line (NCLH) all got a bump thanks to rumors that Chinese firm HNA is interested in acquiring a cruise company. That may or may not happen, but I expect CCL to continue rewarding investors either way. CCL currently yields 2.5%.

BoeingTop Dividend Paying Stock #6: Boeing (BA)

Lastly, Seattle-based Boeing makes airplanes, as you probably know. Business is booming, thanks to strong demand from airlines in the U.S. and abroad. Free cash flow has grown by 6% per year in each of the last five years (on average), and EPS have risen by an average of 8% per year. Earnings have beaten estimates in each of the last four quarters, and 20 analysts have raised their estimates over the past month. Analysts now expect EPS to grow a whopping 30% this year, and 10% next year.

Boeing gets about one-third of revenue from its Defense and Space & Security division. Those big government contracts add consistency to revenues, and could add a kicker to growth if U.S. defense spending increases significantly under President Trump. (After initially criticizing Boeing on Twitter over Air Force One costs, the President seems to have made peace with the company, which is a major manufacturing employer.)

Boeing is a champion of rewarding investors. Over the past five years, the company has increased its dividend by nearly 20% per year, while reducing its share count each year.

After breaking out of a three-year trading range to the upside in January 2017, the stock is now consolidating just under all-time highs. At current prices, BA yields 3.1%.

Timothy Lutts

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