We recently published a list of 10 Magnificent Dividend Growth Stocks to Invest In. In this article, we are going to take a look at where A. O. Smith Corporation (NYSE:AOS) stands against other magnificent dividend growth stocks to invest in.
Dividend stocks remain a popular choice among investors due to their ability to generate steady income. Experienced investors, including Warren Buffett, have long recognized their value, as evidenced by the significant presence of dividend-paying stocks in his portfolio. While often underestimated, dividends have played a crucial role in overall investment returns. Between 1960 and the end of last year, approximately 85% of the broader market’s total cumulative return stemmed from reinvested dividends and the benefits of compounding. Strategies centered around dividend-paying stocks offer the potential for greater stability, consistent income, and a safeguard against economic uncertainty, making them a strong choice for resilient portfolios.
With ongoing tariff uncertainty in the U.S. contributing to market volatility, investors are increasingly turning to dividend-focused strategies to strengthen portfolio stability. After a period dominated by growth stocks, interest in dividend investing has gained momentum. Over the six months leading up to January 31, 2025, US-listed dividend-focused exchange-traded funds (ETFs) recorded average monthly net inflows of nearly $3.3 billion, a sharp rise from the $107 million seen during the same period the previous year, according to a report by Franklin Templeton. Amid an uncertain global economic outlook, investors are seeking more stable assets to create balanced portfolios. Dividend stocks, particularly those with strong fundamentals, tend to provide steady and predictable cash flows. Since these cash flows play a key role in equity valuation models, determining the intrinsic or fair value of dividend-paying stocks is generally more straightforward compared to assessing the value of growth stocks.
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Dividend stocks are attractive due to their ability to reduce volatility during market downturns while still providing meaningful growth potential. Historically, dividend-focused strategies have shown resilience across different regions and time periods. The Franklin Templeton report further highlighted that over the three years ending December 31, 2024, dividend-paying stocks experienced lower volatility and smaller maximum drawdowns compared to the broader market across global, US, and European segments. When inflation and interest rate concerns resurfaced last August, dividend stocks proved to be relatively stable in comparison.
Among dividend stocks, investors are more inclined to companies that have raised their payouts consistently. A report by Nuveen indicated that companies initiating or increasing dividends have historically performed well in the three years following an initial Federal Reserve interest rate hike. While the Fed began lowering rates in 2024, the report suggested that rate cuts would proceed at a slower pace in 2025 due to persistent inflationary pressures.
Given the higher interest rate environment, the report emphasized the importance of focusing on dividend-paying companies with strong fundamentals, solid balance sheets, healthy free cash flow, and management teams committed to sustainable dividend growth. In contrast, sectors with high yields but elevated debt levels could face challenges due to their sensitivity to interest rate changes.
Sam Stovall, chief investment strategist at CFRA, also noted that companies with a strong history of increasing dividend payments are typically well-capitalized and financially stable, making them less volatile than the broader market. He suggested that including such companies in an investment portfolio could help reduce fluctuations. Stovall also pointed out that dividend-paying firms generally experience lower volatility compared to those that do not offer dividends.
Our Methodology
For this article, we scanned the list of dividend aristocrats, which are the companies that have raised their payouts for 25 consecutive years or more. From that list, we picked 10 companies with the highest 5-year annual average dividend growth rates. The stocks are ranked in ascending order of their annual average dividend growth in the past five years.
At Insider Monkey, we are obsessed with hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A man in overalls soldering a large water heater inside a manufacturing facility.
A. O. Smith Corporation (NYSE:AOS)
5-Year Average Dividend Growth Rate: 7.49%
A. O. Smith Corporation (NYSE:AOS) is an American manufacturing company, headquartered in Wisconsin. The company specializes in residential and commercial water heaters for its consumers. It reported mixed Q4 2024 earnings, with revenues amounting to $912.4 million, down 8% from the same period last year. Following three consecutive years of record sales, the company experienced a decline in revenue in 2024, largely attributed to a sluggish economy in China that continued to weigh on consumer demand. Additionally, water heater sales in North America softened in the second half of the year. However, boiler sales in the region saw an 8% increase, driven by strong demand for high-efficiency commercial products.
Despite reporting weak results, A. O. Smith Corporation (NYSE:AOS)’s cash position remained stable in 2024. The company generated $581.8 million in operating cash flow and its free cash flow for the year came in at $473.8 million. It also returned $496 million to shareholders through dividends and share repurchases. At the end of December 31, 2024, the company had approximately $240 million available in cash and cash equivalents.
On January 17, A. O. Smith Corporation (NYSE:AOS) declared a quarterly dividend of $0.34 per share, which was in line with its previous dividend. Overall, the company has raised its dividends for 32 years in a row. Moreover, it has been making uninterrupted dividends to shareholders for 85 years. With a dividend yield of 3.06%, as of March 9, AOS is one of the best dividend aristocrat stocks on our list.
Overall, AOS ranks 8th on our list of magnificent dividend growth stocks to invest in. While we acknowledge the potential for AOS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AOS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
