Investors looking for a safe, reliable income stream should look no further than package handler UPS(NYSE: UPS); aerospace and defense giant Raytheon Technologies(NYSE: RTX); and heating, ventilation, air conditioning, and refrigeration (HVACR) parts distributor Watsco(NYSE: WSO). All three have dominant market positions and offer the prospect of many years of dividend hikes ahead.
1. UPS is a great value stock
The case for buying UPS isn't only based on its leading position in package delivery; it's also about how UPS maximizes the profitability in its end markets. It's a common error to assume that because Amazon is building out its own network, UPS will suffer.
The reality is that there's enough demand to go around, and UPS's current strategy reflects that. Instead of chasing delivery volume for volume's sake, UPS's transformational strategy of focusing on developing business with targeted end markets (such as small and medium-sized businesses, healthcare, business-to-business e-commerce, and high-growth international business) is proving highly successful.
As such, the company is a year ahead of its 2023 targets for revenue and profits. Moreover, CEO Carol Tome's "better, not bigger" approach implies a willingness to forego less-profitable deliveries. For example, volume and revenue from Amazon are coming down this year as a result.
Everything points to a company focused on sweating its existing assets effectively to generate earnings, cash flow, and dividends for investors. Moreover, given the long-term trend toward e-commerce (accelerated by the pandemic), UPS will likely deliver solid dividend growth for many years. Now trading at a 3.1% dividend yield, UPS is an excellent option for dividend-seeking investors.
2. Raytheon Technologies is the pick of the aerospace and defense sector
Raytheon Technologies was created by merging the commercial aerospace-focused businesses of the former United Technologies with the defense-focused businesses of Raytheon in the spring of 2020.
Against the backdrop of the global pandemic that started around that time, Raytheon investors must have wondered what they had got into, with lockdowns and travel restrictions severely threatening the future of the commercial aviation industry.
That said, the tables have turned now, and most investors can see the benefit of having a balanced (aerospace as well as defense) portfolio of businesses. For example, the defense business supported Raytheon during the worst of the pandemic, and now that commercial aviation is returning strongly, the commercial aerospace businesses are carrying the growth baton.
It's an essential balance because defense and aerospace are industries that require a heavy up-front investment, which doesn't come to fruition until many years later -- they both need ongoing cash to support investment.
A great example comes from Raytheon's Pratt & Whitney geared turbofan (GTF) aircraft engine, which took 20 years and $10 billion to develop. With the GTF now in service (most prominently on the Airbus A320 neo family of aircraft), Raytheon can look forward to multiple decades of growth from sales of aftermarket parts and services.
The balance of businesses works, and with management planning on substantive cash flow generation in the future, today's entry point (coming with a 2.4% dividend yield) is attractive.
3. Watsco is an under-the-radar gem for investors
This HVACR distributor is the most significant player in a highly fragmented market in the U.S. As such, it has a growth opportunity by continuing its "buy and build" strategy of expanding geography and market share by acquiring smaller distributors and then enhancing the acquired businesses by adding products and technologies.
In addition, given the strength of its relationship with original equipment manufacturers like Carrier (formerly part of the self-same United Technologies discussed above), Goodman, Trane, York (part of Johnson Controls), and others, the opportunity for growth at the acquired businesses is substantive.
However, it's not just about growth; Watsco also has a defensive quality to its earnings. If, for example, you own an air-conditioning unit, you will probably need it serviced at some point in its lifetime. That recurring expenditure is Watsco's recurring revenue stream.
All told, a combination of solid, reliable growth prospects and a 3.1% yield make Watsco a buy for income-seeking investors.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lee Samaha has positions in Trane Technologies plc. The Motley Fool has positions in and recommends Amazon and Watsco. The Motley Fool has a disclosure policy.