Some dividend stocks are widely owned and followed, while others quietly offer solid payouts to investors without much fanfare. Those underappreciated dividend stocks often offer the best deals, but many investors don't even consider them.
Three of our Motley Fool contributors want you to know about A.O. Smith (AOS 1.96%), Kulicke & Soffa Industries (KLIC +0.86%), and PetMed Express (PETS 0.43%). Read on to find out why these unknown but amazing dividend stocks belong in your portfolio.
Check out the latest PetMed, Kulicke & Soffa, and A.O. Smith earnings call transcripts.
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The newest member of the Dividend Aristocrat club
Tyler Crowe (A.O. Smith): Most stocks that have a dividend yield as low as A.O. Smith's aren't going to turn investors' heads. At a forward yield of 1.85%, you can get a better yield from the S&P 500 index. What makes water heater manufacturer A.O. Smith's dividend compelling is the company's track record of consistently growing its payout at the recent rates it has been sporting.
2019 marks the 25th year in which A.O. Smith has increased its yearly payout, which makes the company part of the esteemed Dividend Aristocrat group of stocks. Only 131 publicly traded companies have achieved this level of consistency, which goes to show that the company's management has investors' best interests in mind.
Perhaps more compelling than the company's recent introduction into the dividend aristocrat club is the rate at which it has grown its payout. In 2018, it announced two dividend increases that resulted in its 2018 payout being 30% higher than the prior year's dividend. It's not out of the question for the company to maintain this pace, as it has more than $400 million in net cash (total cash minus total debt) on the balance sheet, and its business churns out loads of free cash flow.
Some investors might not be too excited about the company's 2019 guidance, and its stock isn't exactly cheap for a company expecting tepid growth in the near term. For investors looking for a reliable dividend that will likely grow significantly over the next several years, however, A.O. Smith is certainly worth a look.
A small-cap semiconductor dividend
Tim Green (Kulicke & Soffa Industries): Small-cap semiconductor equipment manufacturer Kulicke & Soffa doesn't get a lot of attention. It got none from dividend investors until last June, when the company initiated a $0.12-per-share quarterly dividend, good for a 2.2% yield.
Kulicke & Soffa doesn't sport an ultra-high dividend yield, but it does have a lot going for it. The balance sheet is a fortress, with $632 million in cash and investments and no debt. That cash is important, because the semiconductor equipment market is cyclical. Kulicke & Soffa's revenue and profits ebb and flow along with demand, so a strong balance sheet is critical during the tough times.
Kulicke & Soffa stock doesn't look all that cheap based on recent results. Earnings per share plunged by nearly 50% in the first quarter, and analysts are expecting a steep drop in 2019. But those earnings are depressed by softness in demand, and they'll recover down the road when the cycle turns.
Investing in Kulicke & Soffa requires some fortitude, given how much the bottom line can fluctuate year to year. This isn't the kind of company that grows steadily. But the dividend is backed by a ton of cash, so it's not threatened by temporarily depressed earnings. Kulicke & Soffa is a solid dividend stock that almost no one is paying attention to.
This little-followed high-yield stock is no dog
Sean Williams (PetMed Express): Sometimes the purr-fect dividend stock is right under your nose.
PetMed Express is anything but a household name. Despite having been in business for more than 22 years, the company, which sells prescription and nonprescription medicines for dogs and cats online directly to consumers, goes largely unnoticed by Wall Street. That is, until it has a poor quarter -- then it becomes Wall Street's chew toy.
Recently, PetMed Express had one of its bad quarters. The company reported flat year-over-year sales of $60 million but delivered only $0.38 in earnings per share (EPS). This was down from the prior-year period, when it earned $0.44 in EPS on a diluted basis, with both revenue and EPS widely missing Wall Street's expectations. However, this is just one quarter, and there are a few trends that should work in the company's favor over the long run.
First, there's the growing love Americans have for companion pets, such as dogs and cats. A 2012 Harris Interactive survey of more than 2,600 adults found that 91% believe their pet is a part of their family. This suggests that these pet owners will spend whatever is necessary to ensure the health and longevity of their four-legged friends. This year alone, the American Pet Products Association is calling for $72.1 billion in estimated spending, with $18.3 billion going to vet care and $15.5 billion for supplies and over-the-counter medicines. In other words, PetMed Express has a growing market at its fingertips -- and it's one that's been resistant to all recessions thus far.
PetMed also has its low overhead and competitive pricing working in its favor. Just as branded medicines can seemingly cost an arm and a leg for humans, pet medicines are seeing their fair share of inflation, too. PetMed can step up to the plate by being a lower-cost online alternative for the consumer.
All told, PetMed is a company with mid- to high-single-digit growth potential that's currently paying out a 4.6% yield. Best of all, its payout ratio is under 60% of projected 2019 full-year EPS, suggesting that it's sustainable. Over the long run, this should be an unknown but amazing dividend stock.
