Searching for reliable dividend income requires more than just sniffing out the highest yield. The “Best Dividend” screen is designed to filter for quality over pure yield, ensuring that the stocks it identifies have strong underlying fundamentals. The strategy focuses on companies with a high dividend rating to ensure a strong payout history and growth, but it also insists on decent profitability and a healthy balance sheet. This approach helps avoid the common trap of a high yield that results from a plunging share price or a dividend that is unsustainable. By requiring a minimum profitability and health rating, the screen sifts out financially weak companies, leaving only those that can likely maintain and grow their payouts over the long term.
A. O. Smith Corp. (NYSE:AOS) is a clear example of this strategy in action. The company, which manufactures water heaters, boilers, and water treatment products, is a classic dividend-growth candidate that has successfully passed the screen’s strict filters.
Dividend Strength
For dividend investors, A. O. Smith presents a convincing case. The company holds a ChartMill Dividend Rating of 7 out of 10, which is the entry requirement for this screen. This high score is backed by several positive factors.
The stock offers a yearly dividend yield of 2.28%, which is significantly above the average for its industry peers (0.74%) and also beats the S&P 500 average (1.81%). This yield is attractive, but the real story lies in its sustainability and growth path.
A. O. Smith has an excellent track record, having paid and consistently increased its dividend for at least 10 years. The dividend has grown at an annual rate of 7.16%, which is a strong sign of management's confidence in the business’s future cash flows. More importantly, the payout ratio stands at a very healthy 35.83%. This means the company is only paying out about a third of its earnings as dividends, leaving plenty of room for reinvestment and providing a solid cushion against any potential downturns. This high dividend rating aligns perfectly with the screen’s goal of finding reliable, growing income streams.
Profitability and Health: The Foundation
A high yield is useless if the company cannot sustain it. This is where the screen’s additional filters become critical. A. O. Smith scores an 8 out of 10 on both the ChartMill Profitability and Health ratings, placing it among the best in the Building Products industry.
Its profitability is notable. The company reports a Return on Equity (ROE) of 29.40% and a Return on Invested Capital (ROIC) of 24.36%, figures that outperform over 95% of its industry peers. These metrics indicate a highly efficient business that generates significant profit from its capital, which directly supports its ability to pay and grow dividends.
Financially, the company is extremely solid. It has an Altman-Z score of 8.11, which indicates virtually no risk of bankruptcy. Its debt level is minimal, with a Debt/Equity ratio of just 0.06 and a Debt to Free Cash Flow ratio of 0.28, meaning it could theoretically pay off all its debt in under four months. This pristine health rating ensures that the dividend is not being funded by excessive leverage, a key requirement for long-term income investors.
Valuation and Growth Context
While the screen prioritizes yield, profitability, and health, it is also useful to look at valuation. A. O. Smith trades at a Price/Earnings (P/E) ratio of 16.68, which is below the industry average (21.37) and the S&P 500 average (27.42). This suggests the stock is not overvalued relative to its peers and the broader market.
However, growth is a weaker point. The company’s ChartMill Growth Rating is a lower 3 out of 10. While revenue and earnings have shown modest long-term growth, the pace is expected to slow. For a dividend investor, this is not a deal-breaker, but it means future dividend growth will likely rely more on the company’s strong cash generation and commitment to shareholders rather than explosive earnings expansion. The full fundamental analysis report provides deeper detail on these dynamics.
More Potential Candidates
A. O. Smith Corp. clearly meets the criteria set by the Best Dividend screen, offering a blend of a solid, growing dividend supported by outstanding profitability and a bulletproof balance sheet. It is a strong example of the type of resilient company this strategy is designed to find.
For investors looking to build a portfolio of similar stocks, many more potential candidates pass these strict filters. You can explore the full list of stocks that meet these criteria by running the screen yourself to see all the current results.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Always conduct your own research before making any investment decisions.