There are many metrics that investors can use to evaluate a company, but for income investors, the ability to pay and increase its dividend is a key indicator of financial strength. A dividend is a percentage of a company’s profit, so when a company issues a dividend it indicates they have enough profits to meet short-term liabilities and want to reward shareholders.
When it comes to dividend stocks, the stocks with consistent dividends are in demand, stocks with consistently growing stocks are in even higher demand, and the Dividend Kings are in the highest demand.
The most attractive feature of dividend kings is they are mature companies in mature industries. For example, you won’t find any of the FAANG stocks in the list of dividend kings because they haven’t been around long enough to have paid 50 years of dividends.
Growth stocks like the FAANG names are high on the risk/reward scale but low on the capital return scale. Investors can get a significantly higher total return when the stock is performing well but, on the other hand, these stocks can also deliver a big downside and lots of volatility.
Dividend kings, on the other hand, can provide capital growth and frequently do, but they usually have a far lower growth rate than a pure growth stock. The upshot is the dividend which usually adds another few percentage points to the total return that can be compounded over time, in good time and bad.
Dividend Kings Have A Place In Your Portfolio
Dividend stocks have a place in any investor’s portfolio but not all dividend stocks are the same. Like any retail purchase, investors frequently get what they pay for and this could be for better or for worse. Caveat emptor. Let the buyer beware.
In this article, we’re breaking down a specific category of common stocks known as the dividend kings that have a proven track record of success. Their success is measured by 5 decades of dividend growth that proves sound management and long-term thinking. Investors looking for safe, steady dividend returns, reinvestment, and a growing yield-to-investment profile the Dividend Kings are a good group of stocks to pick from.
What are Dividend Kings And Why Are They Important?
A company’s willingness to issue dividends is an indication of financial health and stability. The commitment to increase that dividend every year is even more so. The added attraction is that annual dividend growth encourages long-term investors to “buy and hold” which helps reduce volatility and gives some protection from downturns.
Dividends, unlike other metrics (like free cash flow and even revenue), are difficult to manipulate. Issuing a dividend means the company has enough cash left over after they have covered its short-term liabilities. More importantly, for investors, it signifies a belief from management that the company will continue to have excess cash into the future.
This highlights another benefit of dividend stocks – once a company begins to issue a dividend, it will generally prioritize it in the future. Dividend kings take that commitment to the next level by increasing the payout to shareholders every year and doing so for longer than many investors have been alive.
Why Should You Invest In Dividend Kings?
First and foremost, dividend kings are dividend stocks and, while dividend stocks can play a role in any investor’s portfolio, it’s important to understand that stocks of dividend kings put value and payouts well above growth.
Dividend kings have historically higher overall returns over extended periods because of their dividend payments. Dividend kings are also proven to have less volatility which is good for most portfolios.
But how do you know a dividend king’s dividend is stable? To do that you should pay attention to the dividend payout ratio. The dividend payout ratio is the amount of a company’s earnings that they pay in dividends. Some sectors, like utilities, are known to pay a high percentage of their earnings as a dividend and many Dividend Kings do too, generally speaking..
Among current dividend kings, the lowest dividend payout ratios are running in the high 20%-range and the highest is in the low 80%s with the average near 55%.
Another important benefit to investing in dividend kings (as well as any dividend stock) is the opportunity to have income gains achieved taxed at a lower rate that is similar to the long-term capital gains rate. If investors hold the stock for a specified length of time prior to the ex-dividend date, their dividends will be considered to be qualified dividends which means that instead of the gains being taxed as ordinary income, they will be taxed at a lower rate.
There Are No Dividend King Indexes And ETFs
Due to the small sample size there is no index specifically for dividend kings. However, investors can invest in a number of ETFs that follow dividend aristocrats which is the next best thing. Since dividend aristocrats are similar in character to dividend kings, there is a similar degree of safety plus these stocks are well on their way to becoming Dividend Kings.
There are hundreds of U.S.-listed ETFs that invest in dividend stocks. Investors can sort these funds by category and style ranging from market cap to emerging markets.
History favors investors who invest in dividend kings. To illustrate this, the website Simply Safe Dividends provided this illustration of investors who invested $200,000 at the beginning of 1991.
In the illustration, the investors put one half (or $100,000) in the S&P 500 Index and the other half equally across each of the dividend kings that trade on the major stock exchanges. In this example, investors did nothing more than reinvest their dividends. They didn’t buy or sell the stock to rebalance and did not invest any new money. The example spans 27 years.
The money that was invested in the S&P 500 Index compounded at an annual rate of 10.2% giving investors almost $1.4 million by the end of 2017. That’s impressive.
By contrast, the dividend kings portfolio compounded at a 13.8% annual rate, giving investors nearly $3.2 million over the same time. Now there is some bias to this number because the data doesn’t account for dividend kings that ultimately fell off the list. But it’s still a powerful example of the importance of reinvesting dividends.
But the other thing the study showed was that investing in dividend kings results in lower volatility. A lower volatility means the value of an investor’s portfolio will fluctuate less. Specifically, the dividend kings portfolio had annual volatility of 12.5% as opposed to the S&P 500 Index portfolio which had a 17.3% annual volatility. It doesn’t mean that the dividend kings portfolio never suffered a correction. But over time, it had lower highs but higher lows as well.
For example, in 2008, an absolutely brutal year for the market, the dividend kings portfolio returned a negative 14% while the S&P 500s total return was down 37%. One of the reasons for this is that dividend kings usually possess defensive characteristics that allow them to “outperform” in bear markets.
Dividend King Outranks Dividend Aristocrat
The only difference between the two is in the number of years of dividend growth, and the fact the Dividend Aristocrats are an official S&P index tracking S&P 500 stocks.
Dividend aristocrats have the distinction of being S&P 500 stocks increasing dividends for over 25 years. The easy way to think about the two groups is that every dividend king is a dividend aristocrat, but not every dividend aristocrat has risen to the level of dividend king. Either way, these companies are regarded as some of the most sought-after stocks by income-oriented investors.
The Dividend Kings Of 2022 Are …
Complete List of 37 Dividend Kings for 2022
|
Ticker
|
Name
|
Sector
|
Years of Dividend Increases
|
|
MMM
|
3M Co.
|
Industrials
|
63
|
|
ABT
|
Abbott Laboratories
|
Healthcare
|
50
|
|
ABBV
|
Abbvie Inc
|
Healthcare
|
50
|
|
ABM
|
ABM Industries Inc.
|
Industrials
|
55
|
|
MO
|
Altria Group Inc.
|
Consumer Defensive
|
52
|
|
AWR
|
American States Water Co.
|
Utilities
|
67
|
|
BDX
|
Becton, Dickinson, And Co.
|
Healthcare
|
49
|
|
BKH
|
Black Hills Corporation
|
Utilities
|
50
|
|
CWT
|
California Water Service Group
|
Utilities
|
53
|
|
CINF
|
Cincinnati Financial Corp.
|
Financial Services
|
61
|
|
KO
|
Coca-Cola Co
|
Consumer Defensive
|
59
|
|
CL
|
Colgate-Palmolive Co.
|
Consumer Defensive
|
58
|
|
CBSH
|
Commerce Bancshares, Inc.
|
Financial Services
|
53
|
|
DOV
|
Dover Corp.
|
Industrials
|
66
|
|
EMR
|
Emerson Electric Co.
|
Industrials
|
64
|
|
FMCB
|
Farmers & Merchants Bancorp
|
Financial Services
|
56
|
|
FRT
|
Federal Realty Investment Trust
|
Real Estate
|
54
|
|
GPC
|
Genuine Parts Co.
|
Consumer Cyclical
|
65
|
|
FUL
|
H.B. Fuller Company
|
Basic Materials
|
52
|
|
HRL
|
Hormel Foods Corp.
|
Consumer Defensive
|
56
|
|
JNJ
|
Johnson & Johnson
|
Healthcare
|
59
|
|
KMB
|
Kimberly-Clark Corp.
|
Consumer Defensive
|
50
|
|
LANC
|
Lancaster Colony Corp.
|
Consumer Defensive
|
58
|
|
LOW
|
Lowe’s Companies, Inc.
|
Consumer Cyclical
|
59
|
|
NFG
|
National Fuel Gas Co.
|
Energy
|
51
|
|
NDSN
|
Nordson Corp.
|
Industrials
|
58
|
|
NWN
|
Northwest Natural Holding Co
|
Utilities
|
65
|
|
PH
|
Parker-Hannifin Corp.
|
Industrials
|
65
|
|
PEP
|
PepsiCo Inc
|
Consumer Defensive
|
49
|
|
PPG
|
PPG Industries, Inc.
|
Basic Materials
|
50
|
|
PG
|
Procter & Gamble Co.
|
Consumer Defensive
|
65
|
|
SJW
|
SJW Group
|
Utilities
|
55
|
|
SWK
|
Stanley Black & Decker Inc
|
Industrials
|
54
|
|
SCL
|
Stepan Co.
|
Basic Materials
|
54
|
|
SYY
|
Sysco Corp.
|
Consumer Defensive
|
51
|
|
TR
|
Tootsie Roll Industries, Inc.
|
Consumer Defensive
|
52
|
|
UVV
|
Universal Corp.
|
Consumer Defensive
|
50
|
Risks of investing in dividend kings
While no investment is ever without any risk, dividend kings are about as risk-free as you can get in the stock market. These companies have a history of solid business performance and of increasing their dividend every year for more than half a century. Think about everything our economy has gone through in that amount of time. These are not fly-by-night companies. They are companies that have shown they are well run.
But remember the primary reason you are investing in a dividend king is for the security of that dividend. These stocks are not known for spectacular growth, although any individual stock may outperform the market at any given time.
Dividend investors know the one thing that truly matters when evaluating a company’s dividend is stability and growth. Dividend yields go up and down and frequently a high dividend yield is a signal of a company that is having financial problems, not financial strength.
Companies that not only pay out a dividend on a regular basis but also increase their dividend show a commitment to building shareholder value. And while there is no direct correlation, dividend kings typically show healthy balance sheets as well. They have to in order to sustain their long history of dividend increases.
