Many investors focus only on giant companies. That's not a bad approach, but there are lesser-known businesses out there that deserve attention, too. In fact, smaller and less-known industry players can often grow more quickly than the majors, juicing your portfolio's long-term performance in the process. Two that are worth putting on your watch list are A.O. Smith (AOS -1.05%) and Steel Dynamics (STLD -3.16%).
A little hot water, please
If you've ever taken a cold shower, for whatever reason, then it likely was a good reminder of just how wonderful it is to have reliable access to hot water. That's what industrial company A.O. Smith is focused on. With a market cap of roughly $9 billion, it's not tiny, but compared to competitors like General Electric and Emerson Electric, it is definitely not a household name.
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In North America, the water heater maker has a stable business where replacement sales are a bigger factor than sales for new construction. Slow and steady is the name of the game. The North American market accounted for around three-quarters of A.O. Smith's segment sales in the first quarter. This is the foundation upon which it is growing its "rest of world" business. In countries like China and India, large and growing numbers of people are entering the middle class, and one of the first things that upwardly mobile people want to add to their daily lives is easy access to hot water. The size of the opportunity for A.O. Smith is massive, given that both China and India have massive populations that are climbing the socioeconomic ladder.
While these countries' fortunes will likely experience wider swings than North America, the long-term trend is for more rapid growth over time, and that's what backs A.O. Smith's dividend growth. It's already a Dividend Aristocrat with 29 consecutive annual hikes, and over the past decade, its dividend has grown at a compound annual rate of more than 20%. Those stats suggest that A.O. Smith is worth getting to know.
"Steeling" some DNA
When it comes to steel companies, names like U.S. Steel and Nucor (NUE -1.08%) are the first ones that probably come to mind for most investors. But don't overlook Steel Dynamics, an up-and-comer that has been putting up impressive growth numbers.
The key to Steel Dynamics' success actually harkens back to Nucor, the largest and most diversified steel mill operator in the United States. Nucor's also one of the most reliable, highlighted by its status as a Dividend Aristocrat that's on the verge of becoming a Dividend King, despite the inherently cyclical nature of its industry.
So how does that relate to Steel Dynamics? Well, its co-founder and CEO cut his teeth at Nucor.
That helps explain the similarities between the two operations. Both operate electric arc mini-mills, which are generally more flexible than older steelmaking approaches. Both focus on building businesses that turn commodity steel into higher-margin products. And both make returning a steady stream of dividends to shareholders a priority, though much-younger Steel Dynamics' streak is only up to 12 years. That only earns it a spot among the Dividend Achievers, but there's a key number here that investors should pay attention to.
Over the past decade, Nucor's dividend growth rate was in the low single digits, while Steel Dynamics' dividend grew at a compound annual rate of 10% over that same span. If you want a steel giant that's slow and steady, $31 billion market cap Nucor is your company. But if you want one that's in growth mode and rewarding investors with sizable dividend hikes, then lesser-known Steel Dynamics, with its $14 billion market cap, might be more to your liking.
Looking past the obvious
There's nothing wrong with buying big, well-known companies. However, there are often smaller, faster-growing competitors toiling away behind them without getting much attention. That's the basic story for water heater manufacturer A.O. Smith and steelmaker Steel Dynamics. For long-term investors focused on growth, notably dividend growth, both are worth a deep dive.
