2 Top Dividend Stocks in Industrial Machinery

Though it still faces its fair share of risk, the global economy is steadily firming up. Global gross domestic product is forecast by the World Bank to expand at a rate of nearly 3% in 2018 and 2019. This bodes well for the industrial machinery market, which provides equipment to industries such as agriculture, construction, technology, and materials handling. The industrial machinery market is expected to grow at a compounded annual growth rate of 6% between 2016 and 2024, according to Hexa Research.

As major industries go, this is a pretty fast expansion rate, and creates opportunities for companies which exhibit market dominance or credible industry niches. For dividend-oriented investors looking to participate in these opportunities, consider two top dividend stocks in industrial machinery: a global giant that needs little introduction, and a scrappy, dynamic equipment provider that dominates its niche.

Buy and hold on to John Deere

Global farm and construction equipment titan Deere & Company (NYSE: DE) operates in three major segments: agriculture and turf, construction and forestry, and financial services. The company often combines its first two segments for analysis purposes into "global equipment operations" and refers to its third segment as "financial services operations."

Deere is enjoying a fairly good year in 2017. Total revenue has increased 8% in the first nine months of the fiscal year, and net income is up 33%. However, forward guidance provided by the company in its most recent earnings report put a kink in its stock performance, though shares are still up an impressive 54% since January of 2016.

Deere has grown equipment sales by focusing not just on mechanical improvements to its offerings, but by prioritizing the productivity of its end users. For example, its large agricultural equipment lines are supplemented with "precision agriculture" technologies, which help farmers increase yield. These technologies range from GPS-guided equipment to on-board apps that monitor field conditions.

For example, in September 2017 Deere paid $305 million to acquire Blue River Technology, a company which combines computer vision with artificial intelligence to correctly identify weeds from plants. The technology guides field equipment to spray chemicals only on weeds (as opposed to blanketing the entire field), and it's said to reduce chemical use by 95%.

Deere is also attractive to investors as it employs a strategy of "shareholder value added," or SVA, which it defines as operating profit, less an implied charge for the company's cost of capital. This focus creates a self-imposed profit hurdle for management each year, which over time benefits shareholders.

SVA is increased by Deere's ability to act as a lender to its customers. The company's financial services division augments total operating income by providing higher margins than equipment sales. For example, in the first three quarters of fiscal 2017, financial services lending generated roughly 10% of the company's $21.7 billion in revenue, but approximately 20% of Deere's operating profit of $2.7 billion.

Deere is a rather conservative dividend payer: It hasn't raised its $0.60 quarterly dividend since fiscal 2014. This has to do in part with the nature of the agricultural and construction industries in which Deere sells its equipment -- their tendency to move in boom and bust cycles makes management cautious in its quarterly dividend increases. Nonetheless, the dividend yields 2% at current share price, and Deere's dividend payout ratio weighs in at a very lean 37.1%. With reinvested dividends, a shareholder in Deere & Company would have averaged an annualized total return of 14% over the last five years.

Get attached to this truck attachments specialist

Milwaukee, Wisconsin-based Douglas Dynamics Inc (NYSE: PLOW) is a commercial work truck upfitter and manufacturer of work truck attachments which traces its history back 65 years. More recently, the organization debuted on the public markets in May 2010. Douglas Dynamics is tiny, and indeed dynamic. While its market capitalization of $805 million is just a fraction of Deere & Company's nearly $38 billion market cap, it owns many established and leading brands in the snow plow and salt-spreading truck attachment markets, giving it a predictable source of revenue, earnings, and cash flow.

The company's primary business segment, work truck attachments, is dedicated to the snow and ice control industry. According to Douglas Dynamic's most recent annual report, it owns the world's most extensive distribution network for ice-control products, with over 2,000 points of sale spread across North America, northern Europe, and Asia.

In 2016, Douglas acquired Dejana Truck & Utility Company for $206 million, and created a second business segment, work truck solutions, which concentrates on the upfit of commercial vehicles. This new revenue stream provides insulation against the variability of weather patterns, as snowfall amounts are the one wildcard in an otherwise stable business in the primary attachments segment. Through the first half of this year, work truck solutions contributed 30% of the total revenue of $212 million.

Douglas Dynamics may be a small player in the industrial equipment market, but shareholders love its net profit margins, which typically hover around 10% -- a very decent amount of profit within the context of its industry. But most compellingly, due to the company's stable business model, management maintains a dividend-first mentality when allocating its generous operating cash flow. CEO James Janik illustrated this approach during the company's most recent earnings conference call:

This focus on dividends leads to a somewhat high payout ratio of 75%. At present, Douglas' dividend yields 2.75%. The debt Janik refers to is the borrowing incurred when the company purchased Dejana, which has pushed Douglas' debt-to-equity ratio up to 1.4, higher than a benchmark reading of 1.0, yet quite manageable.

Douglas' dividend yield would be higher if not for the stock's cumulative price appreciation of nearly 215% in the 7.25 years in which it's operated as a public company. Reinvesting those dividends would have generated a total return of 357%, or nearly 49% per year.

Of course, this phenomenal appreciation has made the PLOW ticker a little pricey, but less so than you'd expect due to its strong earnings. Douglas' forward price-to_earnings ratio of 19.5 isn't too much ahead of Deere's, which currently sits at 16.3. Thus, investors can feel comfortable taking a position now as Douglas "plows" ahead in the truck attachments market.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Douglas Dynamics. The Motley Fool has a disclosure policy.