We recently compiled a list of the 10 Best Dividend Growth Stocks to Buy and Hold Now. In this article, we are going to take a look at where A. O. Smith Corporation (NYSE:AOS) stands against the other dividend growth stocks.
The AI sector maintained its momentum unabated in the second quarter of 2024, with tech stocks continuing to lead the charge. Despite the Fed scaling back rate cut expectations from three to one at the quarter’s outset, stocks surged to end in positive territory by quarter-end. This was buoyed by better-than-expected inflation numbers and strong first-quarter earnings. The broader market gained 3.48% in Q2 2024 and its 12-month returns came in at over 23.4%. Dividend stocks underperformed the broader market recently, but with tech giants now beginning to issue dividends, analysts are optimistic about dividend prospects this year. The recent addition of Alphabet to the dividend-paying group suggests that these mega-cap tech companies could increase their dividends gradually over time. However, analysts caution that current dividend yields from these stocks remain relatively modest.
In the current market environment, investors are keenly exploring opportunities to boost their income. Despite their low performance so far this year, dividends gain importance in this regard as they have historically been crucial in generating returns for investors over many decades. Since 1960, approximately 85% of the total cumulative return of the S&P 500 Index can be traced back to reinvested dividends and the compounding effect they offer.
When we talk about the compounding effects of dividends, we refer to the advantages they provide, particularly when they grow consistently over time. This growth allows for larger dividend payouts which, when reinvested, can further accelerate the overall investment return through compounding. In addition to providing compounding effects, companies that raise their dividends have also historically outperformed the market and those companies that cut or don’t pay dividends at all. According to data by Ned Davis Research and Hartford Funds, dividend growers and initiators have delivered a 9.62% return to shareholders from 1972 to 2018, compared with an 8.78% return of dividend payers. Dividend growers also outperformed dividend non-payers, who returned only 2.40% during this period. Read more about dividend growers in our article, Best Dividend Kings to Buy for Safe Dividend Growth.
A company’s past track record of growing dividends is often the best crystal ball for predicting future growth. A low payout ratio, which measures dividends against earnings, also signals potential for future dividend growth. High dividend yields can falter in tough times, precisely when investors rely on them most. Companies with a history of dividend growth demonstrate their resilience, continuing to increase dividends even in downturns. Currently, there is rising demand for companies that distribute dividends, driven by an aging US population, seeking additional sources of immediate income. According to a report by Janus Henderson, global dividends reached $1.66 trillion in 2023, growing from $1.23 trillion in 2020. The banking sector achieved record-high dividends last year, accounting for half of the global dividend growth. This increase was largely facilitated by a higher interest rate environment, which allowed many banks to expand their profit margins. The firm expects global dividends to reach their all-time high of $1.72 trillion in 2024, which would show a 3.9% growth from 2023 on a headline basis.
Companies that consistently raise their dividends have strong business models and solid balance sheets. In this article, we will take a look at some of the best dividend aristocrat stocks for dividend growth.
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. We also considered hedge fund sentiment around each stock in Insider Monkey’s database, as of the first quarter of 2024. 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 275% since May 2014, beating its benchmark by 150 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 Annual Dividend Growth Rate: 8.46%
A. O. Smith Corporation (NYSE:AOS) is an American manufacturing company that specializes in residential and commercial water heaters for its consumers. The company reported strong Q1 earnings due to increased sales of commercial high-efficiency water heaters and reduced steel costs in North America, where demand for water heaters remained strong. In addition, the company achieved a 6% sales growth in China, despite ongoing macroeconomic challenges, thanks to the positive market reception of its newly launched kitchen products. The company expects that sales from North America boiler and water treatment business will grow approximately 8% to 10% in 2024.
A. O. Smith Corporation (NYSE:AOS) benefits a lot from its global presence, which enables it to capitalize on an energy efficiency-driven replacement cycle in the US and growth in emerging markets in India and China. The company reported a 16% YoY growth in sales in India as demand was strong across all its segments. That said, China’s market is unpredictable due to geopolitical tensions and uncertainties about sustainable growth, with residential demand influenced by the overall housing industry trends.
As a dividend growth stock, A. O. Smith Corporation (NYSE:AOS) is favored among investors because of its dividend growth streak, which spans over 30 years. Moreover, in the past five years, the company has raised its payouts at an annual average rate of 8.46%, which makes it one of the best dividend aristocrat stocks. Currently, it offers a quarterly dividend of $0.32 per share and has a dividend yield of 1.60%, as of July 2. The company has the potential to raise its dividends in the future as well because of its strong cash flow generation. In the first quarter of 2024, it generated $106.6 million in operating cash flow and its free cash flow amounted to over $84.6 million. The company aims to spend $300 million in share repurchasing in 2024.
At the end of Q1 2024, 30 hedge funds tracked by Insider Monkey reported having stakes in A. O. Smith Corporation (NYSE:AOS), down from 33 in the previous quarter. These stakes have a total value of more than $1 billion. Among these hedge funds, Select Equity Group was the company’s leading stakeholder in Q1. The hedge fund also increased its AOS stake by 546% during the quarter.
Overall AOS ranks 10th on our list of the best dividend growth stocks to buy and hold. You can visit 10 Best Dividend Growth Stocks to Buy and Hold Now to see the other dividend growth stocks that are on hedge funds’ radar. While we acknowledge the potential of AOS as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than AOS but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.