I’m a diehard dividend growth investor. This is a strategy that allows you to have your cake and eat it, too. High-quality dividend growth stocks allow for returns that often beat the market.
And you get to collect safe, growing dividend income along the way that also often beats the market. Eat that ever-larger pile of dividends. While the wealth cake grows and grows. You really can’t beat it.
Within the universe of all dividend growth stocks, Dividend Aristocrats are the cream of the crop. These are stocks that have increased their dividends for at least the last 25 consecutive years. Only truly great businesses can execute so consistently for that long.
And one Dividend Aristocrat in particular caught my eye – and my capital – not long ago. Today, I want to tell you about a Dividend Aristocrat that I recently bought. Ready? Let’s dig in.
I already have quite a few Dividend Aristocrats in my personal stock portfolio – a portfolio which has well over 100 positions in it. But there are more than 60 Dividend Aristocrats in existence. And many of them fly under the radar.
Despite many Dividend Aristocrats flying under the radar, they continue to absolutely kill it.
And when I say kill it, I mean that in every possible sense. They kill it at the business level, dividend level, and stock level. One Dividend Aristocrat is doing all of that. And I welcomed it into my portfolio with open arms.
The stock that I recently bought is A. O. Smith Corp. (AOS).
A. O. Smith? Who? Exactly. When’s the last time anyone talking about stocks brought up A. O. Smith? So many of these really high-quality businesses just don’t get the kind of attention they deserve. But that doesn’t matter, because the business continues to perform at a high level.
Before we get into that performance, let’s talk about what this company does.
A. O. Smith is one of the world’s leading providers of water heating and water treatment solutions. I love investing in underrated, boring companies that are basically part of the backbone of our global economy and society. These companies are the “nuts and bolts” of the world, if you will.
I’ve said this in many videos, and I’ll say it again. Water is the liquid gold of the 21st century.
If oil was the liquid gold of the 20th century, water is the liquid gold of this century. And if your portfolio doesn’t have exposure to water-related products and services, I think you’re making a huge mistake. We can’t live without reliable access to clean water. It’s critical to everything we do, including, you know, staying alive. This company is a piece of that global complex, and they’re making a lot of money from their position.
How much money? You might be surprised.
Check this out. A. O. Smith has nearly doubled their revenue over the last decade, with annual sales now bumping up near $3.5 billion. And the company is guiding for $2.88 in EPS at the midpoint for this fiscal year. That’s more than three times their EPS from FY 2012.
Like I said, Dividend Aristocrats are the cream of the crop.
It’s always funny to me. A lot of investors seem to be under this mistaken impression that Dividend Aristocrats can’t or don’t grow. Which is silly. How do you think they got in a position to grow their dividends for decades on end?
The company just released its Q3 results on October 28. And what a doozy.
They hit a home run, guys. Revenue is up 20.3% YOY. EPS increased by 26.2% YOY. Oh, and they also increased EPS guidance for this fiscal year by 5% at the midpoint. I mean, are you seeing those numbers? You might think that decades upon decades into business growth, that there’d be some slowdown. Well, you’d be wrong. This company is firing on every cylinder. And that translates over to the dividend, too.
A. O. Smith has increased their dividend for 28 consecutive years.
In fact, they just increased their dividend less than a month ago, by 7.7%. The 10-year DGR is an outstanding 21.9%, so this most recent dividend increase was actually a bit undersized. With their recent revenue and EPS numbers, though, I suspect that the next dividend increase will be a whopper. While the stock’s yield of 1.5% beats the market, this is really more of a long-term compounder than a current income play. And with the dividend only sucking up 38.9% of this fiscal year’s EPS at the midpoint, the dividend is positioned to grow at a high rate for years to come.
I mentioned that this stock is a long-term compounder. That’s understating it.
The stock is up by more than 650% on price alone over the last 10 years, before even factoring in dividends. It’s compounded at an annual rate of 26.8% over the last decade, which would have turned a simple $1,000 investment into more than $10,000 today.
This level of compounding is generally reserved for only very high-quality companies.
Hint, hint. This is a very high-quality company, with excellent fundamentals across the board. They’re a leader in an industry where you want to be a leader. They’ve steadily reduced the float, improved margins, and kept the business fiscally responsible with a fantastic balance sheet. Regarding that last point, they have about $106 million in long-term debt. That’s on a company with a market cap of $11.9 billion. They’re nearly debt free.
I like this stock so much, I decided to plunk down some of my own cash and buy it.
I initiated a position in the business on October 26th, just before they released Q3 results. I picked up my shares for $66.58/each, and I alerted my Patrons to this move in real-time. It’s now well over $70/share, as their blockbuster Q3 report sent the stock skyrocketing.
Even after the explosive move upward, I don’t see the valuation as unreasonable.
Shares are trading hands for a P/E ratio of 25.9. That’s not crazy high for a business growing at over 20% per year. We’re talking about a PEG ratio that’s slightly over 1. Furthermore, the stock’s own five-year average P/E ratio is 26.1. So it’s right in line. We can see that it typically commands this kind of earnings multiple. It’s not as cheap as it was when I picked up my initial tranche of shares, but it doesn’t look expensive to me.
The explosive move up is a bit frustrating when you’re trying to accumulate shares, but I really like this stock here.
Even though I’d rather see a stock drop while I’m buying it, which gives me the chance to average down and buy more shares at lower prices, this is a stock that I think is worth continued accumulation. The Q3 report gave us a look into how the business is doing right now, and I found nothing to complain about. Simply put, the company is operating at a very high level, and the stock is following suit. I plan to buy more. If this stock isn’t already in your portfolio, take a good look at it.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.We’re Putting $2,000 / Month into These Stocks
The goal? To build a reliable, growing income stream by making regular investments in high-quality dividend-paying companies. Click here to access our Income Builder Portfolio and see what we’re buying this month.