I have high hopes that this top dividend stock will become a dividend king before 2030

Over the past ten years, Sherwin Williams (NYSE: SHW) has covered investors’ portfolios with outsized profits, delivering a total return of 419%, compared to 243% for the S&P 500In addition to the strong stock performance, the company has also grown its dividend at a rapid pace.

Earlier this year, Sherwin-Williams announced an 18.2% dividend increase, marking the 45th consecutive year of raising its payout, putting it on track to become a Dividend King by 2029. Dividend Kings are S&P 500 companies that have paid and increased their dividends for at least 50 consecutive years.

That’s why Sherwin-Williams is an excellent blue chip dividend stock to buy now.

Image source: Getty Images.

An Introduction to Sherwin-Williams

Sherwin-Williams is a conglomerate whose portfolio extends well beyond the flagship brand Sherwin-Williams. Other notable brands include Valspar (paint, stains, sealers), Minwax (wood finishes), Purdy (paint products and tools), Krylon (spray paint), Thompson’s WaterSeal (multi-surface sealers, cleaners), Cabot (stains, bleach oils), Ronseal (wood stains, paints), and others.

Sherwin-Williams makes corrosion-resistant coatings for commercial vessels and the marine industry to protect against harsh and humid environments. It sells to residential, commercial and industrial customers, adding a layer of diversification to its business model and helping protect against the cyclicality of its end markets.

For example, DIY store is struggling with stagnant sales due to reduced spending on home improvement as home sales volumes decline. Like Home Depot, Sherwin-Williams is benefiting from a hot housing market and consumer spending on home improvement and DIY projects, but its business is diverse enough that its results aren’t entirely dependent on consumer strength.

SHW Turnover (TTM) data by YCharts

Sherwin-Williams is generating record revenues and diluted earnings per share (EPS) as margins recover. The company saw revenues rise between 2019 and 2021 on a flood of spending on goods and home improvement projects. But as you can see in the chart, revenues fell in the years that followed and sales growth stagnated.

But Sherwin-Williams has once again entered a new growth gear, posting impressive results at a time when many consumer-facing materials and industrial companies are not. For example, toolmaker Stanley Black & Decker has been in a recession for years and is restructuring its activities.

In short, Sherwin-Williams is performing despite some challenges. The full-year guidance calls for $10.85 to $11.35 diluted EPS — excluding an $0.80 per share acquisition-related depreciation charge. If Sherwin-Williams hits the midpoint of that guidance, it would have a price-to-earnings ratio of 28.6 based on full-year results. That’s not a lofty price for the company, but it is on the expensive side. But Sherwin-Williams is generally an expensive stock, with a median price-to-earnings ratio of 31 over the past 10 years and a median price-to-earnings ratio of more than 33 over the past three to seven years.

A results-oriented dividend

The chart below provides a good representation of Sherwin-Williams’ approach to dividends.

SHW Turnover (TTM) data by YCharts

Over the past five years, the company has grown its dividend and earnings at about the same rate and much faster than its revenue, which means the company is becoming more efficient. You’ll also notice that the payout ratio has declined over the past five years, thanks to strong earnings growth. The payout ratio is only 27%, meaning that $0.27 of every dollar in earnings goes to dividend payments. A payout ratio of 50% is generally considered healthy, so Sherwin-Williams’ dividend is affordable.

In addition to dividends, Sherwin-Williams uses buybacks as a key way to reward shareholders. Over the past 10 years, it has reduced its share count by 12%, nearly quadrupled its dividend, and the stock has returned an astonishing 372%, far outpacing the S&P 500 and Nasdaq Composite.

SHW data from YCharts

During that period, Sherwin-Williams gave shareholders an average annual return of 18.8%. It is unlikely that it can match those gains now, given that it is a much larger company. Still, management deserves credit for its excellent track record of allocating capital to grow the business and making smart acquisitions.

Sherwin-Williams is a balanced buy

At first glance, Sherwin-Williams may seem like a boring company with an overvalued, undervalued return. But when you dig deeper, you see that the company does a lot more than just make interior paint.

Sherwin-Williams is not overpriced compared to its historical valuation. And given management’s commitment to payouts, we can expect earnings and dividends to continue to grow at about the same rate.

Overall, Sherwin-Williams is an excellent dividend stock to buy now, and there’s every reason to think it can become a Dividend King by 2029.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.