Why Income Investors Should Love These 2 Industrials Stocks

By Markets Fool.com

Companies in the industrials sector make products that are critical to the economy, andservice a wide range of industries. Unfortunately, one market critical to industrials is energy, and the massive decline in oil prices over the past several months has obviously taken its toll on energy companies. Industrials companies have been a casualty of oil's collapse, because energy companies reeling from crashing oil are cutting capital spending on new projects.

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Dover Corporation and Eaton Corporation are highly exposed to the energy sector. Because of this, Dover and Eaton have seen their stock prices decline 16% and 5%, respectively, over the past six months. Their growth is suffering from conditions in the oil and gas markets, but the impact is overstated because they operate very diverse businesses. The end result is that income investors can snatch up these two high-yielding stocks at cheaper prices.

Diversified business models
Dover and Eaton cater to multiple markets, including agriculture, aviation, healthcare, and manufacturing. Of course, they also provide products to the energy and mining sectors and are seeing orders from these industries decline. Dover works with companies in the drilling and production businesses, developing high-performance lifts, pumps, sensors, and monitoring solutions. Dover derives approximately 27% of its revenue from the energy sector.

Meanwhile, Eaton provides generation, transmission, and distribution solutions for utilities, and builds hydraulic solutions and turnkey installation services for oil and gas companies. Weakness in commodities was a contributing factor to Eaton's hydraulics segment posting a 5% revenue decline last quarter, but hydraulics represents only 12% of total revenue, so Eaton will easily withstand the rout in the energy market.

Still, exposure to the oil and gas markets didn't stop Dover from producing 11% revenue growth last quarter and 8% growth for 2014, along with 10% growth in adjusted earnings per share from continuing operations last year. To be sure, Dover will be affected by the collapse in oil prices. Its outlook reflects this, as management expects flat revenue in the first quarter, due almost entirely to projections for a 6%-9% decline in energy revenue this quarter, but its diversified business should still keep it afloat. Eaton grew operating profit by 13% last year, and expects 3%-4% revenue growth in 2015.

Cash flow and cash returns remain healthy
Despite the downturn in energy, Dover and Eaton operate such large and diversified businesses that their overall financial performance remains strong. They both generate more than enough cash flow to fund their growth projects as well as reward shareholders. Eaton generated $944 million in operating cash flow last quarter, which set a record. Dover raked in $786 million of free cash flow last year, and returned $859 million to investors in combined share repurchases and dividend payments. Dover announced a fresh 15 million share repurchase authorization last month. This will allow the company to opportunistically buy back its own stock at advantageous prices. Dover also increased its dividend by 7% last year, which represents the 59thyear in a row in which the company has raised its payout.

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Like Dover, Eaton is a premier dividend growth stock as well. The company increased its dividend by 16% last year, and over the past five years has raised its dividend by 14% compounded annually. At recent stock prices, Dover yields 2.3% and Eaton offers a 3% yield.

Boring can be beautiful
Dover and Eaton don't get a lot of attention in the financial media. They aren't the hot new investing idea; instead, they operate slow and steady businesses that churn out higher profits like clockwork. Despite the impact of lower orders from their energy customers, both Dover and Eaton reported strong earnings last quarter and in 2014.

Their reduced outlooks for 2015 reflect the carnage sweeping through the oil and gas industries, but thanks to their diversified businesses, it's likely they'll be just fine overall. Their high operating cash flow in recent quarters is evidence of their strong businesses. Dover and Eaton offer high dividend yields and strong dividend growth, and their recent stock price declines are a great opportunity for income investors -- proving that when it comes to business models, boring is beautiful.

The article Why Income Investors Should Love These 2 Industrials Stocks originally appeared on Fool.com.

Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.