April 5, 2023
If you are a retail shareholder with a diverse portfolio, chances are you have a number of industrial stocks. And why not? Industrial companies make up the backbone of the American economy. There is a reason the Dow Jones Industrial Average, which tracks the prices of 30 blue-chip stocks, is one of the most watched stock indexes.
Industrial stocks are popular in part because the companies behind them make tangible products that individual investors can understand. They make things. Industrial stocks can be divided into several sub industries, four of which include: capital goods; aerospace and defense; transportation and logistics; and construction equipment and building supplies.
Individual investors turn to industrial stocks for several reasons. These stocks tend to have strong returns when the economy is strong. It is easy for investors, especially those new to the market, to see that when the economy is up, industrial stocks tend to be as well. Industrial stocks often represent companies that have been around for decades, if not more than a century. They tend to represent older, established companies with a long track record of performance. And the companies often pay substantial dividends. About 18% of the so-called dividend aristocrats, companies that not only consistently pay a dividend to shareholders but annually increases the size of its payout, are industrial companies.
Industrial stocks represent some of the largest companies traded on the markets. A few prominent industrial sector stocks include 3M (Tii:MMM), Delta Air Lines (Tii:DAL), Lockheed Martin (Tii:LMT), General Electric Company (Tii:GE), United Parcel Service (Tii:UPS), Honeywell International (Tii:HON), Deere & Company (Tii:DE) and Boeing (Tii:BA), to name just a few.
Industrial stocks have an outsided importance to the overall economy, even though the industrial sector is the sixth largest of the 11 sectors that make up the S&P 500. Industrial goods make up 8.4% of the overall index. Industrial stocks also act as one of the market’s main bellweathers.
As of the first quarter of 2021, the economic output of the industrial sector was $9.6 trillion and in 2022, according to the U.S. Bureau of Labor Statistics, the sector employed about 20 million people with about 11 million working in manufacturing, 7 million in construction and close to a million in mining. Because of this, industrial stocks are often popular investments for those who work for the companies.
Like any investment, there are risks involved in investing in industrial stocks. We already mentioned that industrial stocks tend to do well when the economy is growing and strong. The opposite is true as well. Industrial stocks tend to underperform when the economy is weakening. Since industrial stocks deal in tangible products, they can be battered when supply chains are affected (as they were during COVID), when there is international instability (as is the case with the war in Ukraine) and tariff pressures (as we see with China).
Regardless of if you are a new retail shareholder or a seasoned veteran of the markets, the industrial sector plays an outsized role and its companies are worth a look to add to your portfolio. A good way to study the sector is by watching the U.S. Industrial Production Index. If it is on the rise, the economy generally is as well. And if the economy is growing, the industrial sector probably is too.
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