Guest post from Sure Dividend about Dividend Kings and why all Income Investors should consider them.
At Sure Dividend, we believe investors can generate superior returns by selecting high-quality dividend growth stocks, and holding on for the long run. While the financial media obsesses over the daily swings of the market, investors should keep focus on the long-term.
The best dividend growth stocks have maintained long histories of raising their dividends each year, regardless of the state of the market. For example, the Dividend Kings are a group of just 29 stocks, each of which having raised its dividend for at least 50 years in a row.
Let that sink in for a moment—these companies have outlasted wars, recessions, and many other challenges over the past five decades. But they have continued to increase their dividends to shareholders no matter what. For these reasons, we believe the Dividend Kings are a great place to look for high-quality dividend growth stocks.
Dividend Kings: Why Income Investors Should Consider Them
Dividend Growth Investing Overview
Investing in the stock market can seem incredibly risky. Indeed, investors who lived through the Great Recession of 2008-2009 saw first-hand how far stocks can decline during a bear market. In the aftermath of the recession, many investors—particularly retirees—flocked to dividend growth stocks, and for good reason.
In bull markets, dividends serve as a “cherry on top” of rising share prices. And in bear markets, dividend stocks provide a buffer against declining stock prices. In addition, dividends serve a valuable purpose for investors who desire cash flow from their investments. Rising stock prices obviously make investors very happy, but those gains are simply on paper. Investors do not realize those gains until they sell their stocks and receive the cash.
Related Post: An Investment Strategy To Build A Cash Flow Machine
On the other hand, dividends are real cash payments made to shareholders, that can be used for any purpose they wish. Retirees can use the cash dividends to pay for a variety of expenses, and since retirees are no longer earning a paycheck from employment, this cash can be extremely helpful.
Or, shareholders can use their dividend payments to buy more shares of stock—which then leads to more dividends, which can buy even more shares, and so on. In this way, dividend investing can unleash the magic power of compounding, which Albert Einstein is rumored to have called the most powerful force in the universe.
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” -Albert Einstein
But not all dividend stocks are automatic buys.
Even dividend stocks can become overvalued, or have deteriorating fundamentals. In some cases, companies see their sales and earnings fall to the point where they have to cut or eliminate their dividends. Dividend reductions typically lead to a larger drop in the share price, leading to a dreaded “double whammy” of a lower share price and reduced dividend income.
For these reasons, we believe investors should focus on the best dividend growth stocks. These are companies that have the ability to raise their dividends no matter what, year after year. This is why we are huge proponents of stocks that maintain long histories of dividend increases, such as the Dividend Kings.
Why The Dividend Kings?
There are thousands of dividend stocks to choose from. Based on this fact, finding the best dividend stocks can seem like searching for a needle in a haystack. To simplify the process, we believe investors should focus on two specific lists of high-quality dividend growth stocks. First, there are the Dividend Aristocrats, a group of 64 stocks in the S&P 500 Index with at least 25 consecutive years of dividend increases. There are many strong picks within the Dividend Aristocrats that are excellent long-term investments.
The Dividend Kings is an even more exclusive list. The Dividend Kings have raised their dividends twice as long as it would take to reach the list of Dividend Aristocrats. These are companies that have stood the test of time, and proven their business models are capable of long-term success. They widely have strong brands, leadership positions in their industries, and global growth potential. Just a few of the Dividend Kings that investors are likely familiar with, are 3M Company (MMM), Colgate-Palmolive (CL), Procter & Gamble (PG), and Altria Group (MO).
These Dividend Kings have dividend yields above 2.5%, led by Altria’s high yield of 7.3%. Dividend Kings widely offer higher dividend yields than the broader market—the S&P 500 Index, on average, has a dividend yield below 2% right now. In an investing climate marked by falling interest rates and record high stock prices, the Dividend Kings provide superior income to the average S&P 500 stock.
Buy High-Quality Dividend Growth Stocks When They Are Undervalued
Even better, we believe investors should wait to buy high-quality dividend growth stocks when they are undervalued. Valuation is an important concept that is easy for investors to forget, especially when markets are rising. But in the nearly uninterrupted 10-year bull market, the S&P 500 Index has climbed above its historical valuation multiples. Consider that the S&P 500 Index currently trades for a trailing 12-month P/E ratio of 25.4; in the past 140+ years, the index traded for an average P/E ratio of 15.8.
Buying overvalued stocks—even high-quality dividend payers—can generate poor returns over time. If an investor pays too much for a stock, returns could be poor, even with positive earnings and dividend growth. This is why we recommend investors steer clear of stocks with valuations significantly above their historical averages.
One example of an undervalued Dividend King is Farmers & Merchants Bancorp (FMCB), which we view as the top Dividend King of 2020. FMCB is a regional bank in California. It is a relative unknown in the world of dividend stocks. It receives little analyst coverage, is never mentioned in the financial media, and it is a small-cap with a market capitalization less than $700 million. But FMCB has increased its dividend for 55 consecutive years, thanks to its remarkably stable business model.
In 2019, FMCB grew revenue and net income by 15% and 23%, respectively. These were excellent results for a regional bank, many of which struggled last year due to falling interest rates. It has generated steady growth for years. Even better, the stock appears undervalued today, as it trades with a price-to-earnings ratio below 11. It also has a dividend yield of 1.9%, which is slightly above the S&P 500 average.
Final Thoughts
In a world of low interest rates and record high stock prices, investors need to look harder to find reasonably valued dividend growth stocks. This is where the Dividend Kings can come in handy. Not all the Dividend Kings are buys right now, as some have become overvalued. But there are still multiple Dividend Kings that are undervalued, and they also offer above-market dividend yields and long-term growth potential. Income investors such as retirees, should consider the list of Dividend Kings for high-quality dividend stocks.
This post is a Guest post from Sure Dividend. I am not a licensed investment or tax adviser. All opinions are my own. This post contains advertisements by Google Adsense. This post also contains internal links, affiliate links, links to RTC social media, and outbound links to trusted sites.
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