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A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. A.O. Smith generates the majority of its sales in North America, with the remainder from the rest of the world. It has category-leading brands across its various geographic markets.

The company is perhaps best-known for its water heaters. It operates in two operating segments, separated by geography:

Source: Investor Presentation

As you can see, the company has a sizable international presence.

A.O. Smith has raised its dividend for 26 years in a row, including an 8.3% increase in October 2020. Its long history of dividend growth is the result of a leadership position in its industry and a high historical growth rate.

A.O. Smith reported its fourth-quarter earnings results on January 28. The company generated revenues of $830 million during the quarter, which represented an increase of 11% compared to the prior year’s quarter. Revenue increased 7% in North America, while revenue growth was even higher in the rest of the world primarily in China, as this is the company’s biggest foreign market. Earnings-per-share of $0.74 for the fourth quarter increased 31% year-over-year.

For the year, sales and adjusted earnings-per-share both fell 3% from 2020. The company performed relatively well for the year, all things considered.

A.O.Smith has also issued guidance for 2021. The company is forecasting earnings–per–share in a range of $2.40 to $2.50, which would reflect a meaningful earnings acceleration versus 2020.

A.O. Smith operates in a growing industry, with a particularly attractive long-term growth catalyst in the emerging markets. The trade war and the coronavirus have dented emerging market growth in recent quarters, but should not impact A.O. Smith’s long-term growth. The long-term growth potential in the emerging markets remains very favorable for water purification and heating products. The company is poised to keep growing for years in China thanks to the country’s huge population, its robust GDP growth, and a booming middle class. India will also be a major growth market, for the same reasons.

Over the long-term, we believe that A.O. Smith can grow its EPS by 6% per year. With a 1.5% dividend yield and annual dividend increases, A.O. Smith is an appealing stock for dividend growth investors. However, we believe the stock is overvalued right now, and we expect -0.8% annual returns through 2026. Therefore, we rate AOS a sell on valuation concerns.

No-Fee DRIP Dividend Aristocrat #14: Illinois Tool Works (ITW)

Illinois Tool Works is a diversified multi-industrial manufacturer with seven unique operating segments: Automotive, Food Equipment, Test & Measurement, Welding, Polymers & Fluids, Construction Products and Specialty Products.

On February 5th, 2021 Illinois Tool Works reported Q4 and full year 2020 results for the period ending December 31st, 2020. For the fourth quarter, revenue came in $3.48 billion, which was up 0.2% compared to Q4 2019. Positive results in Automotive, Polymers & Fluids and Construction Products was offset by declines in Food Equipment, Test & Measurement, Welding and Specialty Products.

Source: Investor Presentation

Fourth-quarter net income equaled $642 million or $2.02 per share, compared to $641 million or $1.99 per share in Q4 2019.

For the year, Illinois Tool Works reported revenue of $12.57 billion, a decline of -10.9% compared to 2019. Net income equaled $2.11 billion or $6.63 per share compared to $2.52 billion or $7.74 per share in 2019.

The full year performance was challenged by the onset of the coronavirus pandemic in the middle portion of the year, but continued improvement throughout the year bodes well for 2021 and beyond. Illinois Tool Works also provided 2021 guidance, anticipating earnings-per-share between $7.60 and $8.00.

Shares trade for a P/E above 30, above our fair value P/E estimate of 18. Expected EPS growth of 7% per year and the 2% dividend yield are not expected to offset the impact of overvaluation, leading to expected returns of -0.7% per year over the next five years. As with AOS, we rate ITW a sell due to negative expected returns.

No-Fee DRIP Dividend Aristocrat #13: Sherwin-Williams (SHW)

Sherwin-Williams, founded in 1866 and headquartered in Cleveland, OH, is North America’s largest manufacturer of paints and coatings. The company distributes its products through wholesalers as well as retail stores (including a chain of more than 4,900 company-operated stores and facilities) to 120 countries under the Sherwin-Williams name.

The company also manufactures Dutch Boy, Pratt & Lambert, Minwax, Thompson’s Waterseal, Krylon, Valspar (acquired in 2017), and other brands.

Source: Investor Presentation

Even with the coronavirus pandemic severely impacting the economy, 2020 was another year of growth for Sherwin-Williams. For the 2020 fourth quarter, Sherwin-Williams generated revenue of $4.49 billion, a 9.1% increase compared to the same quarter the previous year. This result was driven by a 9.0% increase in the Americas Group, a7.3% increase in the Performance Coatings Group, and a 13.6% increase in the Consumer Brands Group. Fourth-quarter adjusted earnings-per-share totaled $5.09 compared to $4.27 in the year-ago quarter.

For the year, Sherwin-Williams generated $18.36 billion in 2020 sales, representing a 2.6% increase compared to 2019. This result was driven by a 2.1% increase in the Americas Group and a 14.1% increase in the Consumer Brands Group, which more than offset a -2.5% decline in the Performance Coatings Group. Adjusted earnings-per-share equaled $24.58 for 2020, ahead of prior guidance, and a 16.4% increase compared to 2019.

Sherwin-Williams also provided 2021 guidance, anticipating $26.40 to $27.20 in adjusted earnings-per-share for 2021. At the midpoint of guidance ($26.80 per share), the company expects adjusted EPS growth of 9% for 2021.

We believe that Sherwin-Williams is capable of delivering 7% annualized earnings growth over full economic cycles. Growth can come from several factors, including revenue expansion through higher sales at the company’s existing stores, as well as margin improvement, and share repurchases. The company has reduced its share count by roughly -20% throughout the last decade.

Sherwin-Williams is not necessarily in a high-growth industry, but its entrenched position offers the company its fair share of competitive advantages; allowing the business to grow consistently. Further, acquisitions are a way for Sherwin-Williams to enhance its presence, with the recent Valspar transaction being a good example.

During the last recession Sherwin-Williams posted earnings-per-share of $4.70, $4.00, $3.78 and $4.21 over the 2007 through 2010 stretch (with a growing dividend to boot). This is somewhat surprising for a company in the paints and coatings industry –generally thought to be a cyclical business –but illustrates the underlying strength of the company.

The stock trades for more than 30 times earnings. We believe shares are significantly overvalued today. The combination of valuation changes, EPS growth, and the 0.7% dividend yield result in expected annual returns of 1.4% per year.

No-Fee DRIP Dividend Aristocrat #12: Emerson Electric (EMR)

Emerson Electric is an ideal candidate for a no-fee DRIP program, as the company has increased its dividend for over 60 years in a row. Emerson Electric was founded in Missouri in 1890. Today, Its global customer base affords it $18+ billion in annual revenue.

Emerson is organized into two major reporting segments called Automation Solutions and Commercial & Residential Solutions. Automation Solutions helps manufacturers minimize energy usage, waste, and other costs in their processes. The Commercial & Residential Solutions segment makes products that protect food quality and safety, as well as boost efficiency in the production process.

2020 was a difficult year because of the coronavirus pandemic and the ensuing impact on the global economy. And yet, Emerson remained highly profitable, which allowed it to continue increasing its dividend.

The company recently concluded its fiscal 2021 first quarter. Total sales were flat year-over-year and underlying sales were down -2%, excluding favorable currency translation of +1%, and a further +1% from acquisitions. Emerson noted it continued to see strong sales in residential North American markets, while core automation markets were weak, essentially offsetting each other.

Underlying orders were down -4.5% in December, the last month of the quarter, which was ahead of expectations. Residential and commercial orders were strong at up 15%, while Automation Solutions orders fell -13%. Gross profit came to 41.4% of revenue during the quarter, down 100 basis points year-over-year, primarily from deleveraging and unfavorable mix. Earnings-per-share came to $0.83 in Q1, up 24% year-over-year.

Emerson’s valuation has increased significantly due to its impressive stock price rally over the past year. It is now trading well above our estimate of fair value. The stock trades for ~24 times the midpoint of fiscal 2021 expected EPS, which compares to our estimate of fair value at 19 times earnings.

A declining P/E multiple to the fair value estimate could reduce annual returns. We also expect annual EPS growth of 5%, and Emerson stock has a 2.2% dividend yield. Overall, we expect total returns of 2.0% per year through 2026.

No-Fee DRIP Dividend Aristocrat #11: Abbott Laboratories (ABT)

Abbott Laboratories is one of the largest medical appliances & equipment manufacturers in the world, comprised of four segments: Nutrition, Diagnostics, Established Pharmaceuticals and Medical Devices. Abbott has increased its dividend for 49 years, including its impressive recent 25% dividend increase. Abbott has a large and diversified product portfolio, with leadership across multiple categories.

On April 20th, 2021 Abbott Laboratories reported Q1 2021 results for the period ending March 31st, 2021. For the quarter the company generated $10.5 billion in sales (63% outside of the U.S.) representing a 35.3% increase compared to Q1 2020.

Results were up across the board with Diagnostics, Medical Devices, Nutrition and Established Pharmaceuticals increasing sales 119.8%, 13.1%, 6.9% and 2.5% respectively. Diagnostics sales continue to be propelled by demand for COVID 19 tests. Reported earnings per share equaled $1.00, with adjusted EPS totaling $1.32 versus $$0.65 prior. Abbott Laboratories reiterated its 2021 guidance, anticipating adjusted earnings per share of at least $5.00.

With a P/E of 24, Abbott appears overvalued. Our fair value estimate is a P/E of 20. Overvaluation could significantly weigh on shareholder returns going forward. Expected EPS growth of 4% per year plus the 1.5% dividend yield will offset the impact of a declining P/E multiple, but total returns are expected at just 2.1% per year over the next five years.

No-Fee DRIP Dividend Aristocrat #10: Hormel Foods (HRL)

Hormel Foods was founded back in 1891 in Minnesota. Since that time, the company has grown into a juggernaut in the food products industry with nearly $10 billion in annual revenue. Hormel has kept with its core competency as a processor of meat products for well over a hundred years, but has also grown into other business lines through acquisitions.

Hormel has a large portfolio of category-leading brands. Just a few of its top brands include include Skippy, SPAM, Applegate, Justin’s, and more than 30 others.

Source: Investor Presentation

Hormel reported first quarter earnings on February 18, 2021 with results coming in mostly in line with expectations. Total sales were up 3% year over year to a record of $2.5 billion. The gain was due to pricing and mix, which more than offset a 1% decline in volumes. Diluted earnings per share fell 9% to $0.41 against the year-ago period.

Hormel’s main competitive advantage is its 30+ products that are either #1 or #2 in their category. Hormel has brands that are proven, and that leadership position is difficult for competitors to supplant. In addition, Hormel has a global network of distributors that few food companies can rival. Hormel’s earnings-per-share actually grew during the Great Recession, a testament to the stock’s defensive nature.

Hormel stock appears overvalued, trading for 25 times this year’s EPS estimate. We expect 6% annual EPS growth, while the stock has a 2.1% dividend yield. Overall, we expect annual returns of 3.7% per year through 2026.

No-Fee DRIP Dividend Aristocrat #9: Chubb Limited (CB)

Chubb Ltd is a global provider of insurance and reinsurance services headquartered in Zurich, Switzerland. The company provides insurance services including property & casualty insurance, accident & health insurance, life insurance, and reinsurance. The current version of Chubb was created in 2016, when Ace Limited acquired the ‘old’ Chubb and adopted its name.

Chubb has a large and diversified product portfolio.

Source: Investor Presentation

Chubb’s diversified product line served the company well in 2020, as it was able to remain highly profitable and even produce some growth. Revenue totaled $8.4 billion during the fourth quarter of fiscal 2020, up 6% year-over-year. Net written premiums rose 5% year-over-year in Chubb’s core P&C segment, totaling $7.8 billion.

Net investment income of $850 million declined slightly from $860 million in the year-ago quarter. Book value was up by 6% during the fourth quarter, having grown to a new record level of $132 per share.

For 2020, Chubb reported core operating income of $7.31 per share. Assuming markets continue to perform well, and the global economy continues to recover from the coronavirus pandemic, Chubb has a positive growth outlook for 2021.

Shares trade for a price-to-book ratio of 1.2, which is above our fair value estimate of 1.05. Meanwhile, expected book-value-per-share growth of 6% and the 1.9% dividend yield lead to total expected returns of 4.7% per year through 2026.

No-Fee DRIP Dividend Aristocrat #8: Federal Realty Investment Trust (FRT)

Federal Realty was founded in 1962. As a Real Estate Investment Trust, Federal Realty’s business model is to own and rent out real estate properties. It uses a significant portion of its rental income, as well as external financing, to acquire new properties. This helps create a “snow-ball” effect of rising income over time.

Federal Realty primarily owns shopping centers. However, it also operates in redevelopment of multi-purpose properties including retail, apartments, and condominiums. The portfolio is highly diversified in terms of tenant base. Federal Realty has a high-quality tenant portfolio.

Source: Investor Presentation

The trust’s investment strategy is to pursue densely-populated, affluent communities, with high demand for commercial and residential real estate. This strategy has fueled strong growth over the past several years.

2020 was a very difficult year for Federal Realty, and the entire REIT group, as the coronavirus pandemic caused store closures across the country. Federal Realty reported Q4 earnings on 02/11/21. FFO per share came in at $0.99, down sharply from $1.58 in the year-ago quarter. Total revenue came in at $219.5M, down from $239.1M in the year-ago quarter. The portfolio was 92.2% leased as of December 31, 2020.

Despite the steep declines, there were some positive signs. The company sold three properties for combined gross proceeds of $170 million in Q4. During the fourth quarter they also signed 103 leases for 468,901 square feet of retail space, demonstrating leasing volumes at pre-COVID levels.

We expect total returns of 5.2% per year, mostly comprised of the 4.6% dividend yield. Modest FFO-per-share growth will nearly be offset by an expected decline in the P/FFO multiple.

No-Fee DRIP Dividend Aristocrat #7: Aflac Inc. (AFL)

Aflac was formed in 1955, when three brothers — John, Paul, and Bill Amos — came up with the idea to sell insurance products that paid cash if a policyholder got sick or injured. In the mid-20th century, workplace injuries were common, with no insurance product at the time to cover this risk.

Today, Aflac has a wide range of product offerings, some of which include accident, short-term disability, critical illness, hospital indemnity, dental, vision, and life insurance.

The company specializes in supplemental insurance, which pays out to policy holders if they are sick or injured, and cannot work. Aflac operates in the U.S. and Japan, with Japan accounting for approximately 70% of the company’s revenue. Because of this, investors are exposed to currency risk.

Aflac has increased its dividend for over 30 years in a row.

Aflac’s strategy is to increase premium growth through new customers, as well as increase sales to existing customers. It is also investing to expand its distribution channels, including its digital footprint, in the U.S. and Japan.

In the 2021 first quarter, revenue of $5.9 billion increased 13.5% year-over-year, while earnings-per-share more than doubled driven by higher net investment gains.

In general terms, Aflac has two sources of income: income from premiums and income from investments. Taking the items collectively, in addition to an active share repurchase program, reasonable expectations would be for 4% annual earnings-per-share growth over the next five years. However, we believe the stock is slightly overvalued right now, which will reduce shareholder returns. In addition, the current dividend yield of 2.4%, leads to total expected returns of 5.7% per year.

No-Fee DRIP Dividend Aristocrat #6: Realty Income (O)

Realty Income is a retail-focused REIT that owns more than 6,500 properties. Realty Income owns retail properties that are not part of a wider retail development (such as a mall), but instead are standalone properties. This means that the properties are viable for many different tenants, including government services, healthcare services, and entertainment. Realty Income is a large-cap stock with a market capitalization above $24 billion.

Realty Income announced its fourth-quarter earnings results on February 22. Quarterly revenues of $418 million rose 5% from the previous year’s quarter. Funds-from-operations of $0.84 per share dipped 2% year-over-year due to a higher number of shares outstanding. For 2020, AFFO-per-share increased 2% from 2019, to $3.39.

Realty Income expects that its results during 2021 will represent a new record, as funds from operations are expected at $3.47.

Source: Investor Presentation

Realty Income leaps to the top spot on the list, because of its highly impressive dividend history, which is unmatched among the other monthly dividend stocks. Realty Income has declared over 600 consecutive monthly dividend payments without interruption, and has increased its dividend over 100 times since its initial public offering in 1994.

In December, Realty Income raised its dividend by 0.2%, bringing the total dividend growth rate to ~3% for 2020.
The stock has a 4.1% current yield. We estimate total returns at 5.8% per year over the next five years.

No-Fee DRIP Dividend Aristocrat #5: 3M Company (MMM)

3M is a diversified global industrial manufacturer. It manufactures ~60,000 products, which are sold in 200 countries around the world. 3M came to dominate the industrial manufacturing industry through a sharp focus on the most attractive market segments.

3M has increased its dividend for over 60 consecutive years. It is on the exclusive list of Dividend Kings, a group of stocks with 50+ consecutive years of dividend growth. You can see all 31 Dividend Kings here.

It has invested heavily across its core areas of focus to build a product portfolio that leads the pack. 3M is composed of four separate divisions. The Safety & Industrial division produces tapes, abrasives, adhesives and supply chain management software, as well as personal protective gear and security products. The Healthcare segment supplies medical and surgical products, as well as drug delivery systems.

Transportation & Electronics division produces fibers and circuits with a goal of using renewable energy sources while reducing costs. The Consumer division sells office supplies, home improvement products, protective materials and stationary supplies.

3M announced first quarter earnings results on 4/27/2021. Revenue grew 9.6% to $8.9 billion, coming in $460 million above expectations. Adjusted earnings share of $2.77 was a 27% improvement from the prior year and $0.48 better than expected. Organic growth was 8%, with each segment posting at least high single digit growth.

3M is overvalued right row, with a P/E ratio of 21, compared with our fair value P/E of 19. Negative returns from a declining P/E ratio will be offset by 5% annual EPS growth and the 3% dividend yield. Overall, we expect annual returns of 6.1% per year for 3M over the next five years.

No-Fee DRIP Dividend Aristocrat #4: S&P Global Inc. (SPGI)

S&P Global is a worldwide provider of financial services and business information with revenue of nearly $8 billion. It generates about half of its operating income from its ratings segment, 30% from market and commodities intelligence and the balance from S&P Dow Jones Indices. S&P Global’s revenue is split roughly 55/45 between US and International, respectively.

S&P Global has paid dividends since 1937 and has increased its payout for 48 years. In 2020, revenue was up 11% to $7.44 billion. Adjusted net income was up 20% to $2.83 billion for 2021, and on a per-share basis, adjusted earnings rose 23% to $11.69.

The company also performed well to start 2021. First-quarter revenue increased 13% with growth across all four major business units. Adjusted diluted earnings-per-share increased 24% for the first quarter.

S&P Global’s business has benefited from a series of favorable secular trends. Since the Great Recession in 2009, total corporate debt has been on a steady rise, which means more ratings are needed. Lower global interest rates have continued to lead to more and more issuances of debt. In addition, the company has three other very strong segments that aren’t as dependent upon rates remaining low, should they rise again in the future.

Investors are also becoming increasingly sophisticated and thus demand more real-time data and analytics. Moreover, there is an accelerating demand for index-related investments, such as ETFs.

We expect 8% annual EPS growth over the next five years. The stock has a low dividend yield of 0.8%, but raises its dividend at a high rate. We estimate total return potential at 6.2% per year over the next five years.

No-Fee DRIP Dividend Aristocrat #3: Exxon Mobil (XOM)

Exxon Mobil is an integrated super-major, with operations across the oil and gas industry. In 2019, the oil major generated over 80% of its earnings from its upstream segment, with the remainder from its downstream (mostly refining) segment and its chemicals segment.

The company reported better-than-expected results for the 2021 first quarter. Exxon Mobil reported a positive net income of $2.7 billion, equaling $0.64 per share for the quarter. This reversed a loss from the same quarter last year, of $610 million.

Exxon Mobil’s growth potential is challenged by the recent decline in commodity prices, as well as the prospect of a global recession due to the coronavirus. We view the coronavirus as a short-term issue which should abate in a matter of months. The company announced it will reduce capital expenditures by $10 billion to preserve cash in this difficult environment.

Thanks to its promising growth projects, Exxon expects to grow its production from about 4.0 to 5.0 million barrels per day by 2025. The Permian will be a major growth driver, as the oil giant has about 10 billion barrels of oil equivalent in the area and expects to reach production of more than 1.0 million barrels per day in the area by 2025.

Guyana will be another major growth driver of Exxon. The company has nearly tripled its estimated reserves in the area, from 3.2 billion barrels in early 2018 to nearly 9.0 billion barrels now.

Including the 6.0% dividend yield, we expect total annual returns of 7.1% per year over the next five years. Exxon Mobil is a riskier Dividend Aristocrat due to its volatile industry.

No-Fee DRIP Dividend Aristocrat #2: Johnson & Johnson (JNJ)

Johnson & Johnson is a global healthcare giant. It has a market capitalization above $400 billion, and generates annual revenue of more than $81 billion. Today, J&J manufactures and sells health care products through three main segments:

• Pharmaceuticals
• Medical Devices
• Consumer Health Products

It has a diversified business model, with strong brands across its three core operating segments. A breakdown of each segment’s performance can be seen in the image below:

Source: Investor Presentation

On 1/26/2020, Johnson & Johnson announced fourth-quarter and full year earnings results. Revenue grew 8.3% to $22.5 billion, while adjusted earnings-per-share declined 1.1% to $1.86. For the year, revenue was higher by 0.6% to $82.6 billion while adjusted EPS fell 7.5% to $8.03.

In the fourth quarter, pharmaceutical sales were up 16.3% year-over-year. Consumer finished the year with 1.4% sales growth. The Medical Devices segment decreased 0.7%, but this is actually an improvement over prior quarters.

The company expects revenue of $90.5 billion to $91.7 billion and adjusted EPS of $9.40 to $9.60 for 2021.

J&J has increased its dividend for 58 consecutive years, making it a Dividend King. The stock yields 2.5% right now. In addition, we expect approximately 6% annual earnings-per-share growth over the next five years. Lastly, the stock has a P/E of 17.1, nearly in-line with our fair value P/E estimate of 17. All together, we expect total returns of 8.2% per year for J&J stock.

No-Fee DRIP Dividend Aristocrat #1: AbbVie Inc. (ABBV)

AbbVie Inc. is a pharmaceutical company spun off by Abbott Laboratories (ABT) in 2013. Its most important product is Humira, which is now facing biosimilar competition in Europe, which has had a noticeable impact on the company. Humira will lose patent protection in the U.S. in 2023. Even so, AbbVie remains a giant in the healthcare sector, with a large and diversified product portfolio.

Source: Investor Presentation

AbbVie reported its fourth-quarter earnings results on February 3rd. Quarterly revenue of $13.9 billion increased 59% year-over-year, and was primarily due to the acquisition of Allergan. Earnings-per-share increased 32% for the fourth quarter. For the full year, revenue increased 38% while adjusted earnings-per-share increased 18% to $10.56.

The company issued strong guidance for 2021 which calls for adjusted earnings-per-share in a range of $12.32 to $12.52. At the midpoint of company guidance, adjusted EPS are expected to increase 18% for 2021.

AbbVie’s major risk is loss of exclusivity for Humira. Fortunately, the company’s massive research and development platform is a competitive advantage. Research and development expense totaled $6.5 billion in 2020. AbbVie has multiple growth opportunities to replace Humira, particularly in the therapeutic areas of immunology, hematology, and neuroscience.

Based on expected 2021 earnings-per-share of $12.42, AbbVie trades for a price-to-earnings ratio of ~9. Our fair value estimate for AbbVie is a price-to-earnings ratio (P/E) of 10. An expanding P/E multiple could boost shareholder returns over the next five years. In addition, we expect annual earnings growth of 3.0%, while the stock has a 4.7% dividend yield. We expect total annual returns of 9.3% per year over the next five years.

Final Thoughts and Additional Resources

Enrolling in DRIPs can be a great way to compound your portfolio income over time. That being said, I prefer to selectively reinvest my dividends into my current best investment idea. This ensures that DRIPs don’t automatically purchase stocks that I view as overvalued.

Additional resources are listed below for investors interested in further research for DRIP plans.

• List of no-fee DRIPs

For dividend growth investors interested in DRIPs, the 15 companies mentioned in this article are a great place to start. Each business is very shareholder friendly, as evidenced by their long dividend histories and their willingness to offer investors no-fee DRIP plans.