Each week you'll learn how to be a better dividend investor and follow the journey of a welder with a passion for passive income to $1,000,000 and beyond.
Watsco (WSO) has printed new shares every single year for a decade.
Not most years. Every. single. Year.
32.6 million shares in 2016. 38.0 million today.
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Share dilution is one of my bugaboos. Every new share carves a little off my slice. So when I saw that chart, it was a tougher pill to swallow.
But swallow I did and started a position this week, and here's why:
A rising share count is kind of like a check engine light. Nine times out of ten, it means something is actually wrong under the hood. The company's burning cash, printing stock to keep the lights on, and you're paying for it whether you notice or not.
But a check engine light is a light. It isn't a diagnosis. Here are a few things I found with Watsco:
β The dividend grew ten times faster than the dilution. Shares grew about 1.5% a year. The dividend grew 15.4% a year over the last decade. If somebody hands you a 15% raise every year for ten years and takes 1.5% back, I call that a deal.
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β Free cash flow per share went from $7.31 to $18.40. It bounces around year to year β the refrigerant mess I'll get to shifted a lot of inventory around β but over a decade it's more than doubled. That number matters more to me than earnings, and I'll explain why in a second. SimplySafeDividends.com
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β They have zero debt. Not "manageable debt." Zero. Plus $464 million sitting in cash. Remember Papa John's owing more than the whole company was worth in the last newsletter? This is the other end of that spectrum. Watsco 10-Q, June 30 2026
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β They're paying out 67% of free cash flow. Comfortably boring as long as it hangs around that 60% threshold.
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β Twelve straight years of raises, and the latest one was 10%. Not a token penny bump to keep a streak alive.
Quick note on that free cash flow line, because this is the whole ballgame for me.
Earnings are an accountant's opinion. Free cash flow is a bank statement.
EPS has all kinds of non-cash stuff baked into it. Depreciation. Stock compensation. And for a company like Watsco that buys other companies, every acquisition dumps intangibles onto the books that get written down against earnings for years afterward. None of that money actually leaves the building. It just makes the earnings line look worse than the business is doing.
Free cash flow is real money sitting there after the bills are paid. And it's the only money that can actually do anything β buy back shares, pay down debt, fund an acquisition, sit on the balance sheet as a cushion, or land in your brokerage account as a dividend.
That dividend gets paid out of cash. Not earnings. Cash.
So where are all these new shares actually coming from?
Watsco has sold stock into the market twice in ten years. 2017 and 2021. Both times they took the cash and paid off debt. They've got another $400 million program approved right now that they haven't touched a nickel of.
The rest is a drip, and two pieces of it are worth understanding.
Some of it is Watsco's own dividend reinvestment plan β and heads up, this is NOT the DRIP you have switched on at Schwab or Fidelity. When your broker reinvests for you, it buys shares on the open market. No new shares get created. Watsco runs its own separate plan where you sign up directly with the company, hand back your dividend, and get freshly issued stock instead. Watsco keeps the cash.
So yes, real new shares. But the company got paid full price for every one of them, and we're talking 19,346 shares against 38 million. Five one-hundredths of one percent. Rounding error.
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The bigger piece is employee stock. And Watsco does this in a way I've never seen anywhere else.
Their restricted stock doesn't vest in three or four years like everywhere else. It vests at retirement β age 62 or later. Leave early for any reason other than death or disability and you forfeit every single share. Right now about 137 leaders are holding grants scheduled to vest anywhere from now out to 2054.
The CEO's stock has never vested. Not once. His grants are scheduled against him hitting ages 86, 88, 89, and 92. He takes a $600,000 salary and no cash bonus.
So yes, that's dilution. But it's also a management team that physically cannot cash out and walk away. They're stuck holding the same thing I'm holding, for decades. I'll pay 1.5% a year for that.
Low washer fluid.
Now here's the one that isn't washer fluid. This is the "three quarts low on oil" light, and it's the only thing I'm really watching.
So, what happened? The government forced the whole HVAC industry off the old R-410A refrigerant. Contractors panic-bought the cheap old equipment in 2024 β Watsco's residential units jumped 22% in one year. Then 2025 rolled around, and nobody needed anything, because they'd already bought it.
Meanwhile, Watsco had to flip over a billion dollars of inventory across 650 locations to the new stuff.
That's not a dying or broken business. That's a business that ate a one-time rule change and is still standing with zero debt and near record-high cash flow.
And it's already turning. Q2 2026: units up 2%, prices up 2%. They just bought Jackson Supply β 25 locations, $230 million in annual sales.
Which brings me to why I bought.
The yield is 4.22%. Its five-year average is 2.79%. It has been a long time since this stock has been this cheap on a yield basis. Forward P/E of 25 against a 27.8 five-year average. Stock at $313, down from $457.
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The largest HVAC distributor in North America, debt-free, basically being marked down because of a refrigerant rule.
I started a position in the Roth. I'm buying in stages, not all at once, because if it drops further, I want more.
And I know exactly what would prove me wrong: if revenue stays flat for another two years while the share count keeps climbing. Flat sales and more slices is how the pie stops growing. That's the whole thesis in one sentence β as long as free cash flow per share grows faster than the share count, dilution works for me, not against me.
Not every warning light means the engine's shot.
But you have to actually pop the hood. Otherwise you're just guessing β and guessing is how people end up owning a 6% yield that turns into a 0% yield.
Simply Safe Dividends is a resource I use every single day. It's run by a handful of very knowledgable HUMANS and updated constantly. And with this offer, you can try it FREE for one full month with absolutely NO credit card required! πCheck it out!
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Each week you'll learn how to be a better dividend investor and follow the journey of a welder with a passion for passive income to $1,000,000 and beyond.
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