Business

3 dividend growth stocks with an investor-friendly DRIP plan


Some companies offer an automatic dividend reinvestment plan DRIP option to their shareholders. In other words, their shareholders can choose to receive dividends in stock instead of cash. These plans have significant advantages, as they are typically commission-free and help investors maximize the benefits of pooling their income streams.

Additionally, it prevents investors from making emotional mistakes, such as avoiding buying stocks in a bear market, when market sentiment is negative.

Let’s discuss the outlook of three dividend growth stocks that offer DRIP plans.

This ‘King’ provides the tools you need

Illinois Instrument Tool (ITW) is a multidisciplinary manufacturer with seven unique operating segments: Automotive, Food Equipment, Test & Measure, Welding, Polymers & Fluids, Construction Products and Specialty Products. It generates more than half of its sales from international markets.

Illinois Tool Works is characterized by exemplary management, investing large sums of money in R&D every year. As a result, the company has developed a diversified industrial product portfolio and has demonstrated an excellent track record. Despite the inevitable cyclicality of its business, the industrial manufacturer has grown earnings per share in seven of the past nine years, at an average annual rate of 8.5%. .

Furthermore, Illinois Tool Works currently has strong business momentum. The company’s earnings per share fell 14% in 2020 due to the unprecedented shutdown caused by the pandemic, but it rebounded strongly in 2021, with a record EPS of 8.51 dollars, 10% above the company’s pre-pandemic EPS.

In the third quarter of 2022, the company grew revenue 13% from the previous quarter thanks to double-digit growth in five of its seven segments. As a result, it increased EPS 16%, from $2.02 to $2.35 and beat analysts’ estimates by $0.10. It has exceeded analyst consensus for 12 of the past 13 quarters and is on track to grow EPS around 11% this year, to a new all-time high.

Despite its inevitable sensitivity to an economic downturn, Illinois Tool Works has raised its dividend for 58 consecutive years, and so it’s the King of Dividends. This is an admirable achievement for an industrial manufacturer. The company also has a payout ratio of 52% and a solid balance sheet.

As a result, it could easily continue to increase its dividend for many more years. Illinois Tool Works has grown its dividend an average of 13% per year over the past decade and over the past five years. This growth rate is much higher than the industry-wide average dividend growth rate of 8%.

Therefore, while Illinois Tool Works’ current 2.4% dividend yield may seem lackluster on the surface, the stock is suitable for both growth- and income-oriented investors with a vision. long-term.

Entering hot water with a noble

Shirt Smith (AOS) is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. It generates about two-thirds of sales in North America, and most of the rest in China.

Due to the nature of its business, AO Smith is very sensitive to the state of the housing market. The company has benefited greatly from the boom in the housing market, which has remained in place since the end of the Great Recession in 2009.

AO Smith also benefits from the huge growth potential in the China market. It has increased sales by an average of about 20% per year in this country over the past decade. As a result, AO Smith has consistently grown EPS annually over the past decade, at an average annual rate of 16%. This growth combined with consistent business performance is testament to the strength of the company’s business model and solid execution.

It should also be noted that AO Smith currently generates a negligible amount of revenue in India but the country has the same growth potential as China. Therefore, the expansion of AO Smith in India could become a significant growth driver in the long run.

AO Smith is currently facing a strong headwind, with inflation soaring to a 40-year high, putting pressure on the company’s bottom line. In the third quarter, AO Smith’s earnings per share fell 15% from the previous quarter, mainly due to the impact of inflation on the company’s profits and consumer spending. However, the company is still on track to grow EPS around 3% this year, to a new all-time high.

Thanks to its robust business model, AO Smith has increased its dividend for 29 consecutive years and as such, it has been dubbed the Dividend Aristocrat. It also has a healthy payout ratio of 39% and a near-debt-free balance sheet.

It could easily continue to grow its dividend meaningfully for many more years. The company has increased its dividend by an average of 20% per year over the past decade and an average of 15% per year for the past 5 years.

This means that income-oriented investors shouldn’t dismiss the stock as its current modest dividend yield is 2.0%, as the company is likely to more than double its dividend within 7-years. next 10 years.

Don’t shy away from this dividend grower

Founded in 1955, Aflac (AFL) is the largest cancer supplement underwriter in the world. The insurer also offers accident, short-term disability, critical illness, dental, vision and life insurance. Aflac generates about 70% of its pre-tax income from Japan and the remaining 30% from the United States

Aflac operates in two mature, developed countries and therefore its growth potential is somewhat limited. However, the company has shown a solid performance record. Over the past decade, the insurer has never experienced a significant drop in earnings per share and has increased earnings per share at an average annual rate of 8.3%.

Aflac has been hurt by near-record low interest rates common for the past 13 years, up until this year. Low interest rates have hit the insurance company’s investment income, with its portfolio mostly comprised of bonds. However, the Fed is currently raising rates aggressively to restore inflation to its long-term target of around 2%.

Aflac has started floating investments with higher interest rates and therefore is likely to increase investment income in the coming quarters. The impact of the rate hike helps explain why Aflac stock is currently trading at its highest price-to-earnings ratio in 10 years of 13.3. To provide a perspective, the stock traded at a price-to-earnings ratio close to 10 between 2012 and 2021.

Aflac isn’t immune to recession but it’s pretty resilient, as evidenced by its 20% drop in EPS during the Great Recession, the worst financial crisis in 90 years. Its stock price fell during the Great Recession, from $34 to $6, but investors remained focused on the solid fundamentals of the vindicated insurer, as the stock has recovered almost all of its losses in 2009-2010.

The company has an exceptional dividend growth record, with 41 consecutive years of dividend increases. The company has increased its dividend by an average of 9% per year over the past decade and an average of 13% per year for the past 5 years. With a solid payout ratio of 32% and a defensive business model, investors should rest assured that the company will continue to grow its dividend meaningfully for many years to come.

Final thoughts

The three stocks above boast exceptional dividend growth records thanks to their reliable earnings growth trajectories. Thanks to strong business models, they have solid balance sheets. With their healthy payout ratios and reliable business performance, investors should rest assured that these companies will continue to increase their dividends over the next few years.

Income investors should consider participating in their DRIP plans to maximize the compounding impact of reinvested dividends.

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