Typically, most dividend kings maintain payout ratios above 50%, meaning they pay out most of their net income to shareholders through dividends. Although this is great for existing shareholders, it does not leave much room for dividend growth perspective shareholders, as there is little room for any significant future increases.
However, two dividend kings buck this trend.
With payout ratios of just 20% and 28%, Tennant Co.(NYSE: TNC) and MSA Security(NYSE: MSA) offer investors more potential for passive income than their competitors Dividend King. These low payout ratios mean that any company could theoretically triple its dividend and still have funds left over.
Even better for investors, despite these stable companies being leaders in their niches, their share prices have fallen 19% and 32% from their all-time highs.
After this decline, the resilient operations and passive income potential of these dividend kings are too promising to pass up at today’s price. Here is the investment thesis for each company.
Tennant holds a leading market share of 14% in the mechanized cleaning equipment industry. The company sells scrubbers, scrubbers, pressure washers, vacuums and spare parts and services to keep their customers’ cleaning equipment buzzing.
However, while these products have helped make Tennant the dividend king of the past 50-plus years, the company’s investment thesis today hinges on the success of its latest wave of innovation: autonomous mobile robots (AMR).
These AMRs multiply the customer’s work productivity and can propel the company’s stock to new heights.
Image source: Tennant Investor Presentation, November 2024.
Between 2018 and 2023, Tennant sold approximately 6,500 earlier versions of its AMRs.
Along with faster revenue growth, these sales of the new X4 ROVRs offer investors the potential for higher margins thanks to the software subscription included in AMR.
Since launching its first AMR product in 2018, Tennant’s profitability has steadily (and significantly) improved.
Although Tennant’s new AMR sales will cannibalize some of its lower-tech cleaning equipment, these newer AMRs (and their software subscriptions) should help continue to push the company’s margins to new heights.
Buoyed by this rising profitability — and the fact that Tennant uses just 20% of its net income to fund its 1.4% dividend yield — the potential for further dividend growth is clear.
Management expects sales to grow by 4% over the long term as its AI-powered products become more prominent. With Tennant’s stock currently trading at just 13 times next year’s earnings, the company’s leading position (in market share and innovation), improving margins and dividend growth potential make it the Dividend King to buy in 2025.
MSA Safety holds the position no. 1 or no. 2 by market share in a number of security niches. Fueled by this top dog status, MSA Safety has returned 40 sacks since 2000, increasing its annual dividend as it went.
To give you a better idea of exactly what MSA does, here are the products it sells in each of its business segments:
Fire service (39% of sales): Consists of self-contained breathing apparatus, protective clothing, boots and helmets
Detection (36% of sales): Products for detection and identification of fixed gas and flame, portable gases and refrigerants
Industrial PPE (25% of sales): Includes air-purifying respirators, industrial head protection and fall protection equipment
The beauty of these products for investors (besides their real-world life-saving purpose) is that each segment’s products are completely non-discretionary. Firefighting, gas leak detection and industrial worker protection are three things that won’t be going away anytime soon – if ever.
This intrinsic nature of MSA Safety equipment explains the incredible returns and the company’s rise to Dividend King status.
However, the best could be yet to come for the company. Leaning on more connectivity-centric solutions, such as the FireGrid cloud platform and the ALTAIR portable gas detection system, MSA’s operating margins are starting to look more “software.”
Combining security standards that will become more stringent over time worldwide and the ongoing evolution of the Internet of Things, it is clear to see that MSA is operating at the center of two key trends.
If its profitability continues to expand, the company could offer investors plenty of passive income potential. This is especially true because MSA uses only 28% of its net income to fund its 1.2% dividend yield despite growing its payout every year for half a century.
MSA is unlikely to deliver top-line sales growth, with management suggesting 4% annual organic growth through 2028. However, trading at just 20 times next year’s earnings, the company’s growing profitability and leadership in a range of core products make it another magnificent king. dividends that will last for decades.
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