2 Magnificent Dividend Stocks Down 17% and 27% I'm Buying Right Now

Key Points

• ASML's lithography quietly powers a lot of the success of the "Magnificent Seven."

• Badger Meter is modernizing an outdated industry -- and growing its margins as it goes.

• Buying the dip on these two compounding machines looks like a market-beating notion.

• These 10 stocks could mint the next wave of millionaires ›

Some of my favorite purchases to make -- and most successful in hindsight -- have been adding to the steady dividend stocks in my portfolio on the dip.

While there's always the risk of these dips turning into "falling knives," I believe the two stocks in this article have the qualities to thrive over decades.

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Here's the case for these magnificent dividend stocks and why I've been adding shares of each in August.

1. ASML: Powering the "Magnificent Seven" alongside AI's rise

ASML (NASDAQ: ASML) is one of the most critical cogs in the global semiconductor supply chain. The company mastered the art of lithography, a process where ultraviolet light etches tiny patterns onto the silicon wafers used in semiconductor chips.

If ASML and its products disappeared overnight, the technological world would be almost unrecognizable. Most smartphones, advanced computers, artificial intelligence (AI) systems, data centers, and other complex technologies wouldn't exist.

Image source: ASML.

While the Magnificent Seven gets most of today's investing fanfare, ASML quietly enables these behemoths.

Further solidifying its critical importance to the semiconductor industry, ASML is the clear leader in market share for the more mature (less advanced) deep ultraviolet lithography niche. It also holds a virtual monopoly in the leading-edge extreme ultraviolet lithography niche, which sits at the center of AI's rise.

Simply put, barring a currently unforeseeable technological breakthrough that renders the company's lithography less critical over the coming decades, the future's most tech-dense ideas will likely rely upon ASML in some form.

However, despite ASML's dominance in its niche, its stock sits 17% below its 52-week high.

This drop primarily stems from a wide array of geopolitical issues, rather than any operational issues with the company itself. Navigating new tariffs from the United States on the European Union, on-and-off trade restrictions between the U.S. and China, and ongoing tensions between China and Taiwan, ASML has done well to report record sales.

Following the drop, ASML now trades at 28 times earnings. This valuation is roughly in line with the S&P 500's average, and is well below the company's 10-year average of 38.

ASML PE and Forward PE Ratio data by YCharts

Currently, Deloitte expects the global semiconductor industry to grow by 8% through 2040. This increase is nearly double the average annualized sales growth rate of 4% the S&P 500 has delivered since 2000, suggesting that ASML's valuation is quite reasonable.

Powered along by this tailwind, the company is positioned to rebound and beat the market for years.

Topping it all off for investors, ASML handsomely rewards shareholders with stock buybacks and dividend payments. Over the last decade, the company has lowered its share count by 1% annually, while growing its dividend at a 31% yearly rate.

2. Badger Meter: Modernizing the water and sewage industries

Badger Meter (NYSE: BMI) is North America's leading provider of water and sewer monitoring solutions.

Though Badger Meter's flow measurement and advanced metering infrastructure (AMI) don't scream "market-stomping potential," its long-term stock chart says otherwise.

Since 2000, the company has been a 74-bagger, turning each dollar invested at that time into $74 today. Since its initial public offering in 1990, Badger Meter has been a 332-bagger.

These returns occur despite the company's recent 27% decline from its 52-week high.

Badger's stock was pummeled in late July after it delivered second-quarter earnings where sales barely eked past analysts' expectations and earnings per share (EPS) fell short.

Though its EPS only rose 5% compared to a 10% gain in sales, a decent portion of this lower profit margin stems from the ongoing integration of its acquisition of SmartCover earlier this year. Furthermore, free cash flow (FCF) grew by 19%, so investors shouldn't panic over this quarter's disappointing EPS figure.

Lastly, while Badger only grew organic sales by 5%, the company grew revenue by 26% in Q2 2024, making it a challenging comparable quarter to top.

What makes Badger Meter an interesting stock to consider is that its end-to-end BlueEdge solutions are steadily replacing traditional mechanical water and sewer infrastructure. The company's AMI solutions typically require software subscriptions, slowly turning Badger Meter into a quasi-SaaS (software-as-a-service) stock.

These SaaS sales now equal 7% of the company's total revenue. This revenue has grown by 28% annually since 2019, compared to the company's overall sales growth rate of 14% over the same time.

With this budding SaaS unit comes higher margins.

BMI Operating Margin (TTM) data by YCharts

Best yet for investors: 85% of Badger Meter's sales are replacement-driven. This large percentage means that the company has ample opportunity to upsell customers from older, mechanical solutions to its suite of smart water solutions.

With its customers facing stricter regulations, higher expectations for water and energy efficiency, and more stringent quality and safety standards, the company's BlueEdge solutions are often a need, not a want.

Badger Meter currently trades at 34 times FCF.

BMI Price to Free Cash Flow data by YCharts

While this isn't cheap compared to the broader market, it is well below the company's five-year average of 43.

Ultimately, Badger Meter's strong SaaS growth, its rising margins, and its supportive industry megatrends should help it live up to this slight premium.

Finally, the company pays a 0.7% dividend yield whose payments have increased for 31 consecutive years.

While this yield may sound diminutive, Badger Meter raised its dividend payments by 18% this year and 26% last year. Still only using 25% of its FCF to pay these dividends, there is ample room for future increases, which is why I'm delighted to keep adding to Badger Meter at today's valuation.

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Josh Kohn-Lindquist has positions in ASML and Badger Meter. The Motley Fool has positions in and recommends ASML. The Motley Fool has a disclosure policy.