There's an expression in the investing community that money is freedom. I would take it one step further and argue that ever-rising dividend income is freedom. That's because the recent market downturn served as a reminder that wealth on paper can disappear as quickly as it is created. Dividend income, on the other hand, is as steady as a company's profits and cash flow.
Investors eventually learn that the right dividend stocks are the closest thing to a guarantee of a lifetime of reliable, increasing passive income. Let's take a closer look at two Dividend Aristocrats that appear poised to continue paying higher dividends for years to come.
1. A.O. Smith
Operating as a leader in the water heater and water treatment businesses, A.O. Smith (AOS 0.98%) is positioned to cash in on growing demand for its products.
Hot water has a wide array of uses, such as bathing and washing in an individual setting, as well as commercial uses in an industrial setting. As the global economy grows and more households have the disposable income for water heaters, so too will the market. That's why the market research company Allied Market Research estimates that the global water heater market will grow at 5.1% each year from $32.6 billion in 2017 to reach $48.5 billion in 2025.
A.O. Smith's leadership in a growing industry explains how analysts are projecting that the company will produce 8% annual earnings growth for the next five years. If its solid growth prospects weren't enough, A.O. Smith also offers investors a 1.8% dividend yield. For context, this is higher than the S&P 500 index's 1.6% yield.
And given that the dividend payout ratio is expected to be 32% in 2022, the company should have no difficulty handing out high-single-digit-percentage annual dividend increases moving forward. This will allow the Dividend Aristocrat to extend its 30-year dividend growth streak for many more years.
Best of all, A.O. Smith is trading at a forward price-to-earnings (P/E) ratio of 17.5. This is just above the S&P 500 index's forward P/E ratio of 17.2. Along with A.O. Smith's quality, this makes it a great under-the-radar stock to buy for income investors.
2. General Dynamics
In a world fraught with conflict, many countries have taken the West African proverb and U.S. president Theodore Roosevelt's foreign policy ideology, "speak softly and carry a big stick," to heart. In other words, negotiate with adversaries with the goal of peaceful conflict resolution in mind, but have and be willing to use your military strength when necessary.
As one of the largest defense contractors and aerospace companies in the world, General Dynamics (GD 0.52%) is part of the oligopoly filling the demand for weapons and defense systems. The U.S. government comprised approximately 70% of the company's total consolidated revenue of $38.5 billion in 2021.
While this is a great degree of concentration, there's arguably no better customer than the U.S. government. Due to the critical nature of defense spending to homeland security, defense is expected to remain near the top of the U.S. government's priority list. That's why it's forecast U.S. defense spending will increase from $742 billion in 2021 to $998 billion by 2032.
This is expected to translate into 12.2% annual earnings growth for General Dynamics over the next five years. And the company also provides investors with a market-topping 2.2% dividend yield. Considering that General Dynamics' dividend payout ratio will be around 42% in 2022, there should be plenty of flexibility to build on the nearly three-decade dividend growth streak in the years ahead.
With a forward P/E ratio of 18.6, the stock's valuation doesn't seem to be excessive either. This is why General Dynamics is an intriguing pick for both current and future income.