1 Magnificent Dividend Growth Stock Down 16% to Buy Right Now During the Market Correction

The silver lining to any stock market correction is that many excellent businesses trading at lofty valuations quickly become more palatable price-wise. The S&P 500 (SNPINDEX: ^GSPC) had briefly dipped into correction territory last week, and while it has recovered a bit, the broad market indicator is still down 8% from the all-time high it had reached last month. The index is also down 4% for this year so far.

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Meanwhile, the technology heavy Nasdaq Composite is still down nearly 12% from its recent highs.

Not surprisingly, many stocks have also taken a beating over this period as negative investor sentiment prevail over the stock market.

While I don't necessarily wait for dips to add to these top-tier stocks, when I do get one, I try to capitalize on the opportunity. A perfect example of this concept is one of my favorite dividend growth stocks, Badger Meter (NYSE: BMI). Down 16% from its highs in late 2024, Badger Meter has sold off faster than the S&P 500 despite its long-standing history of thoroughly stomping the index.

A 78-bagger since 2000, Badger Meter is currently experiencing one of its most significant pullbacks since 2011. Following this drop, here are the four main reasons why I believe investors should take advantage of this opportunity and invest in this magnificent dividend growth stock.

1. The leader in smart water solutions

Badger Meter is the leading North American provider of water management solutions. Its offerings range from flow measurement and monitoring of water quality, pressure, and grids, to software solutions that provide data and analytics on all the information it collects.

Set to turn 120 years old this March, Badger Meter isn't the type of stock investors would initially think of when looking for multibagger returns. However, thanks to its technology-focused, end-to-end BlueEdge offering -- a suite of tailor-able water management solutions -- the company aims to bring outdated water utilities into the modern era.

Bringing technological known-how to these (often) ancient water niches, Badger Meter's solutions should receive support from an array of megatrends, including:

• Aging infrastructure in need of a replacement cycle
• Higher quality and safety standards
• Stricter environmental regulations and more rigid energy efficiency standards
• Water scarcity and higher rates of severe weather
• Worker churn as Baby Boomers retire, putting pressure on utilities to be more efficient
• Population growth that demands a more resilient water grid

Though Badger Meter's advanced metering infrastructure costs more up front than traditional mechanical meters, its leak detection, remote meter reading, and efficiencies gained through analytics provide cost savings over the longer term.

Leaning into this technology-first strategy, the company has seen its revenue growth balloon as customers look to invest in their aging infrastructure rather than merely cut costs up front.

BMI Revenue (Quarterly YoY Growth) data by YCharts.

With 14 tuck-in acquisitions since 2010, look for Badger Meter to continue its acquisitive ways -- not only to further this revenue growth, but to advance its technological prowess over time.

2. Expanding into a leadership position in wastewater monitoring

Whereas Badger Meter's previous 13 acquisitions forged the company's path as an innovative leader in its water utility niche, its recent $185 million purchase of SmartCover moved it into an adjacent vertical: wastewater and sewage.

This acquisition was the largest in Badger Meter's history and instantly made the company the largest provider of sewer line monitoring in the United States, with a market share of around 50%. SmartCover's 24/7 remote monitoring and sewer inflow and infiltration detection allow utilities to predict adverse events before they happen.

These capabilities perfectly align with Badger Meter's solutions and should create an upsell opportunity for the company as it continues to support its utility clients' ambitions to modernize their infrastructure.

Management believes sewer monitoring is still in its "first inning of adoption," leaving a lengthy growth runway ahead. With SmartCover historically growing sales by 20% and already maintaining profitability, investors will want to monitor the success of this intriguing acquisition over the next few years.

3. Ballooning profitability

As Badger Meter continues to shift from its past of physical meters in a "pre-smart-grid world," its new technology and software-as-a-service (SaaS) solutions have brought higher profit margins along with it.

BMI Operating Margin and Return on Invested Capital (TTM) data by YCharts.

Badger Meter's SaaS revenue has grown by 28% annually over the last six years and now equals 7% of the company's total sales. Since these SaaS sales (and Badger Meter's more technology-dense solutions) have higher margins, the company's operating margin and return on invested capital (ROIC) have steadily risen.

With Badger Meter honed in on maintaining its status as a lead innovator through its technology and SaaS solutions, its profitability could keep improving as these high-margin products grow to become a larger percentage of sales.

Meanwhile, the company's strong (and improving) 22% ROIC highlights management's ability to generate outsize profits from the debt and equity it uses to make its acquisitions. Traits like a high and rising ROIC have historically proven to be a market-beating indicator, making Badger Meter's current figures very promising for the future.

4. Primed for continued dividend growth

Powered by this quickly improving profitability, Badger Meter raised its dividend by 26% this year, marking 32 consecutive years of annual dividend increases. Despite this long run of raises, Badger Meter's 0.7% dividend yield only uses a low 25% of the company's free cash flow (FCF), leaving lots of room for future growth.

While this 0.7% dividend yield may not scream "passive income potential" to investors, it is essential to remember that dividend growth is what we are excited about. Had an investor bought Badger Meter in 2000 and held through today, they would now receive a 36% yield compared to their original cost basis, thanks to two and a half decades of increases.

With Badger Meter's profitability rising -- and all signs pointing to the potential for further improvement -- the company's larger-than-normal 26% dividend increase last year could prove to be more than a one-year phenomenon.

Trading at 41 times FCF, Badger Meter remains more expensive than the market. However, as the leader in an essential water (and now wastewater and sewage) niche, Badger Meter's improving profitability, rising dividend, and history of stomping the market make it a top stock to consider amid the market sell-off.

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Josh Kohn-Lindquist has positions in Badger Meter. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.