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Here’s a stock that’s not particularly cheap, not particularly high-yielding, and not a market-beater. However, it is a dependable business that has paid quarterly dividends every year for the past 70 years while also raising its payout for 30 consecutive years.
This is a company with a relatively low payout ratio and an interesting niche, meaning its dividend payments should continue well into the future.
Donaldson Company, Inc. ($DCI) makes filters.
The company produces commercial aircraft fuel filters, steam filter cartridges used in the food and beverage industry, microelectronics filters used by semiconductor fabrication plants, and hydraulic filtration systems used in the mining sector.
Filters aren’t an exciting business, but they are the unseen backbone of many high-flying industries.
No microelectronics filters, no semiconductors for AI or data centers.
No hydraulic filtration systems, and gold miners and commodity producers face lower profitability as equipment breaks down and requires more frequent servicing.
You get the picture…
Donaldson Company was founded in 1915 and is one of the world’s leading providers of filtration systems and products. The company operates on six continents and has a market capitalization of nearly $10 billion.
As an investment, there’s nothing that immediately stands out.
The company currently trades at a price to earnings ratio of 21.56. That’s a lower valuation than the S&P 500, but not an incredible bargain or a deep discount.
Likewise, the starting yield of 1.49% is higher than the S&P 500’s 1.02%, but it doesn’t stand out compared to other established blue-chip stocks.
Dig a little deeper, however, and there’s a lot to like.
Donaldson has a low payout ratio of 31.87%, meaning its dividend is well covered and leaves plenty of room for future growth. The firm also has a 5-year compound annual dividend growth rate of 7.39%, comfortably outpacing inflation.
Finally, the company recently announced its 30th consecutive annual dividend increase. Donaldson is a Dividend Aristocrat, albeit one that many investors are unaware of.
In terms of long-term performance, Donaldson isn’t a market-beater, but it has consistently delivered solid double-digit returns. The company has generated a 10-year average annual total return of 10.69%, trailing the Vanguard 500 Index Fund ETF’s average annual total return of 15.63%. However, this is also a niche business operating in a sector that most investors largely ignore, making it unlikely to experience the same waves of enthusiasm that often propel the S&P 500’s largest holdings.
Donaldson isn’t a stock I would rush out to buy, but it’s worth highlighting because of its interesting niche as a supplier of critical components to industries such as aerospace, semiconductor manufacturing, and mining. It’s also a company with a conservative payout ratio that supports consistent, inflation-beating dividend growth, along with respectable long-term returns from a sector that generally receives little Wall Street attention.
If you’re looking for niche manufacturing businesses or companies that supply critical components to other industries, Donaldson could be an interesting buy-and-hold investment.
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Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.
