One stocked pond I love to go fishing in -- at least as far as investing goes -- is the world of dividend-growing companies with small, manageable payout ratios. Not only do dividend-paying stocks outperform the broader market, but ones that consistently increase their payouts do even better. 

Furthermore, by looking for dividend-growers with smaller payout ratios, investors can find passive income-generating machines capable of increasing their dividends far into the future. Here's one example: global paint behemoth Sherwin-Williams (SHW 0.58%) and its deceptively powerful 1% dividend yield. 

Off-color results

Extending its share price drop year to date, Sherwin-Williams reported less-than-encouraging earnings for the second quarter of 2022 and saw its shares drop 10% overnight.

While sales grew 9% for the quarter, year over year, earnings per share (EPS) dropped by 9% -- an unusual sight for the normally steady company. Thanks to the dreaded combo of raw material cost inflation and supply chain inefficiencies, the company's gross profit margin dropped from 44.8% a year ago to 41.7% this last quarter.

This drop in gross profit margin sent Sherwin-Williams to never-before-seen levels.

SHW Gross Profit Margin (Quarterly) Chart

SHW Gross Profit Margin (Quarterly) data by YCharts

As concerning as this drop may seem to the company, it may be more of an indicator of how uncomfortable things are on the macroeconomic scene. Operating a global end-to-end supply chain, Sherwin-Williams is uniquely advantaged to thrive when things are good but also at risk of facing excessive pressure when the economy struggles -- precisely as it is today. 

Ultimately, this gross profit margin should revert to its mean, mainly thanks to the company's ability to adjust its wholly owned supply chain as needed.

A bright outlook for the long term

Despite the struggles facing Sherwin-Williams, management is guiding for double-digit sales growth year over year for the third quarter and high-single-digit to double-digit growth for the entire year of 2022. While it also lowered the midpoint of its EPS guidance by $0.80 for 2022, management still expects an adjusted EPS between $8.50 and $8.80, leaving the company to trade at about 28 times projected earnings. 

Leading this EPS recovery and continued sales growth will be a 10% price increase for the company's largest operating segment, The Americas Group. This 10% bump will take effect on Sept. 6 and should offset some weakness seen from the do-it-yourself sales generated from Sherwin-Williams' nearly 5,000 retail stores in North America.

Further fueling the company's long-term growth prospects is the United States' steadily aging inventory of homes, which bolsters the company's repaint sales.

Chart showing the median age of housing stock rising from 23 years old in 1985 to 41 in 2019.

Data source: Sherwin-Williams 2022 financial community presentation.

Whether through repainting older homes, painting for new-home construction, or even industrial paint applications in its Performance Coatings Group, Sherwin-Williams looks poised to continue growing, regardless of market conditions.

The Sherwin-Williams X factor

Quite literally, an X factor for Sherwin-Williams is this chart showing a decline in shares outstanding paired with a steady increase in dividends paid.

SHW Shares Outstanding Chart

SHW Shares Outstanding data by YCharts

This X factor highlights a beautiful combo for investors in Sherwin-Williams as these shareholder returns help generate incredible stock performance. 

SHW Revenue (TTM) Chart

SHW Revenue (TTM) data by YCharts

Sporting a 43-year dividend increase streak, a 1% dividend, and a modest 31% payout ratio, Sherwin-Williams could see its incredible total returns extend far into the future as the company recovers and keeps growing. 

Should the paint giant reach its earnings guidance for 2022 and trade around 28 times earnings (using today's prices), its valuation would be the lowest since the March crash in 2020. 

Due to these remarkable shareholder returns, its currently sold-off share price, and clear tailwinds for an EPS recovery, Sherwin-Williams makes for a premier stock to buy at a rare discount and to hold forever.