dividend kings are the most elite group of dividend growth companies. Many investors are familiar with the dividend aristocrats which are companies with at least 25 consecutives years of dividend increases. To date, the list shows a little bit more than 50 businesses. Over the past decades, many years this list has gone through the cap of 50 consecutive years. Therefore, we had to find a name for those super powered dividend payers. It was already a feat to exist for more than 50 years, it is quite incredible to have been able to distribute and increase their payouts for a half century. The list now counts 18 companies and are named the Dividend Kings.
The Dividend Kings are as follow:
American States Water (AWR)
Cincinnati Financial (CINF)
Dover Corporation (DOV)
Emerson Electric (EMR)
Farmers & Merchants Bancorp (FMCB)
Genuine Parts Company (GPC)
Hormel Foods (HRL)
Johnson & Johnson (JNJ)
Lancaster Colony (LANC)
Northwest Natural Gas (NWN)
Procter & Gamble (PG)
Are Kings Better Than Others?
This is a question that deserves to be asked. By definition, a company distributes its excess cash flow to its shareholders when management doesn’t find any better use of its resources within the company. Instead of “wasting” shareholders’ wealth, the money is being paid through dividends. A company that has been distributing its wealth year after year for such a long time might look like a walking zombie surfing on old principles. Is there any value added within these companies or are they simply money making machines bleeding slowly heading towards an inevitable death?
As at July 30th, I’ve pulled out their stock returns vs the S&P 500 over the past 10 years. I’ve selected this period to see what happened to these companies during a crash (2008-2009) and during a bull market (2009-2016). I wanted to compared the added value to one’s portfolio on top of the dividend payment. Here are the results:
|Company Name||Ticker||10 Year Growth|
|American States Water||AWR||126.00%|
|Farmers & Merchants Bancorp||FMCB||12.15%|
|Genuine Parts Company||GPC||144.80%|
|Johnson & Johnson||JNJ||97.93%|
|Northwest Natural Gas||NWN||70.40%|
|Procter & Gamble||PG||50.66%|
As you can see, out of 18, only 5 companies underperformed the S&P 500 and 7 dividend kings doubled the S&P 500 return. In percentage, this makes 72% companies outperforming the market and 39% of them have returned more than double the market performance to their shareholders. This is without counting the ever increasing dividend payments during this period. To the question; are dividend kings better than the stock market? The above mentioned chart sends a strong answer.
What make Dividend Kings Better Than the Others?
As many human beings try to find the answer to the question of eternity, we will dig further and find if there is a secret behind the longevity of the dividend kings’ distribution increases. The first thing we did was to break down the dividend kings per sector:
It is without any surprise that we see several consumer defensive, consumer cyclical & industrial companies. Most of these companies were created over 100 years ago and have built leadership positions in their respective sectors that is virtually impossible to compete. We have one company in the healthcare sector, Johnson & Johnson (JNJ) which could have also be included in the consumer defensive sector. Interesting enough, relatively small companies in the utilities and financial sectors have made their way onto this prestigious list while rarely making the Bloomberg finance first page.
As we will go through each individual company one by one, you will notice that they all share something in common; each dividend king has a very strong business model and has adapted over the decades. Their ability to continuously adapt through years in order to find new growth vectors within their business (organic growth) or outside through mergers & acquisitions has made them not only leaders of their industry, but leaders of tomorrow in many cases.
Unfortunately, past returns are not a guarantee of the future. We can’t expect winners of yesterday to outperform the market of tomorrow simply with the rationale they done so in the past. However, while the stock market was +70% over 10 years, the average of the dividend kings shows +116.83%. We can only conclude that it was a very good move to build a dividend kings portfolio 10 years ago.
As we are more concerned about the future than the past, I’ve reviewed each company individually in the following article. DSR members have received a more complete analysis including strengths, potential risks and dividend growth potential, for each of them through our newsletter. If you like dividend kings and want more information on how to build a dividend growth portfolio, you can subscribe to our services through various options:
AMERICAN STATES WATER (AWR)
American States Water Co. (AWR) is the parent company of Golden State Water Co. (GSWC) and American States Utility Services, Inc. (ASUS) and its subsidiaries. The company deliver water services to 260,000 clients in California and it also provides electric services to 24,000 customers in the same sate. These operations represent 80% of their business. AWR has also developed an interesting second sector by operating and maintaining water and wastewater systems at various military bases. This is a great sector to develop as many military bases haven’t privatized their systems yet and they sign 50-year contracts.
An investment in AWR is like buying a Swiss watch as the company has been increasing its dividend like clockwork for 61 consecutive years. Management targets an increase of 5% each year for the long term. This means your dividend payment should double each 14.4 years. The water service industry in California is highly fragmented leaving room for AWR to grow through acquisition. It also has another growth vector through ASUS, its military base division. Overall, AWR represents an interesting investment for income seeking investors looking for stability.
CINCINNATI FINANCIAL (CINF)
Cincinnati Financial is a personal and commercial insurance firm. It has developed an agency-centered business model where the “in-person” contact has strengthened relationships with their clients. A secret of their success may lie in the fact that each agency is able to make decisions locally. When done properly, these decisions become an irreplaceable advantage for more corporate governance insurance competitors. The focus has been put on the field and not in headquarters’ management office. The company now shows 1,551 agency relationships throughout 1,993 locations across the U.S.
I like that the company is geared toward continuous growth. Since 2011, CINF has gone from the 26th largest P/C underwriter to 21st place in 2015 (based on net written premiums). Their expertise in the HNW profitable market along with their field focus mentality seems to offer CINF a great competitive advantage for the years to come.
Colgate-Palmolive owns a portfolio of leading brands in several categories throughout the grocery store. Their most important product line is its toothpaste which occupy an impressive market shares in many countries. CL has built solid relationships with retailers which are more incline to leave more space on their shelf to a proven distributor than taking the risk of lack of supply with new businesses. Colgate-Palmolive makes 75% of its sales outside the U.S. including 50% of its sales in emerging markets. While developed markets are slowing down, CL continues to find growth within its emerging markets division.
Would you bet against the world leader in the oral care industry? CL shows oral care sales that are more than three times greater than its closest competitors. With such dominance in a specific market, CL is positioned to benefit from emerging market growth for several years to come. An investment in CL is an investment in a recession proof company showing strong margins and a wide economic moat that is nearly impossible to overcome. CL will definitely continue its amazing dividend increase streak.
Dover offers precision engineered products to four different segments. The energy division focuses on drilling products, bearings & compression along with automated equipment. You can guess this division has had a hard time over the past couple of years. Then, the engineered system division offers printing equipment and automated solutions for the automotive, waste & recycling and packaging industries. The fluids division offers a variety of solutions to pump food, fuel, biomedical and chemical products. Finally, the refrigeration & food division focuses on refrigerated equipment. Dover aims to grow by acquisition in order to use their developed technology in various segments towards acquired products.
As Dover is part of the few dividend kings who has underperformed the stock market over the past 10 years, it may be a good time to select this company. We can see the oil industry slowly coming back with more stability in oil prices. In the event of additional signs of strength in this industry, DOV shows an interesting bounce back perspectives. In the meantime, its solid relationship with its current clients will remain and growth can also come from other acquisitions.
EMERSON ELECTRIC (EMR)
Similar to Dover, Emerson Electric specialises in high tech products and services for its customers. The company shows two divisions which are commercial & residential solutions and automation solutions. Automation solutions is the biggest segment with roughly 2/3 of the company sales in 2015. Its most recent growth vector has been found in China and India as they participate in building important cold-chain infrastructure to keep food fresh. Both countries lose billions due to wasted food. EMR’s performance is also highly linked to providing techno solutions to the oil & gas industry.
Similar to DOV, EMR underperformed the S&P 500 over the past 10 years. This is mainly related to the bad performance of the oil & gas industry. EMR could show stronger numbers a few years from now once the oil industry is back on its feet. In the meantime, climate control technology should be EMR’s focus to bring additional growth within its business model.
FARMERS & MERCHANTS BANCORP (FMCB)
Farmers & Merchants State Bank is a $925 million independent bank that operates 23 full-service branches in northwest Ohio and northeast Indiana. Farmers & Merchants State Bank conducts business in Commercial and Agricultural Banking, Retail Branch Banking, Consumer and Home Lending. F&M also offers a variety of online banking services and has a prominent presence on various Social Media channels. This is the worst performing company among the dividend kings with a poor 12% stock value growth over the past 10 years. We can say that FMCB has very little appetite as the bank exists since 1897 and only started a small expansion in 1971.
As you can imagine, FCMB would not be my first pick among the dividend kings. I find there isn’t enough trading volume and the bank doesn’t have any growth vector to boost their numbers in the upcoming years. I think there are better opportunities among the dividend kings list than FCMB.
GENUINE PARTS COMPANY (GPC)
Genuine Parts Co (GPC) is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical & electronic materials. GPC benefits from strong brand recognition through its UAP Napa stores. The automotive & industrial replacement part industry often selects their distributor with the fastest service and wide choice of products available. Since GPC is the biggest player in both industries, it often comes as the #1 choice by default. Genuine Parts is able to deliver parts efficiently through its wide network and has the size to build sizeable inventory. The company has built a unique growth model based on continuous small acquisitions each year. GPC shows a strong expertise in integrating smaller companies into their efficient network.
A winning strategy for any portfolio building method is to pick strong companies with established business models which have become leaders in their industry. GPC meets all requirements to be considered as such. While you will not see GPC stock price expand by 20% in the next 12 months, you can count on a regular and sustainable growth. Therefore, the company will continue to provide both dividend growth and stock value appreciation for many years.
HORMEL FOODS (HRL)
Hormel foods specialises in protein rich foods. This segment of the food industry has gone through a strong growth trend over the years. The company has also developed healthier food through Jennie-O-Turkey and Applegate in order to diversify its brand portfolio. HRL has done a very good job at creating niche products for narrow markets. It dominates several niche which provide the business a stable customer base. Through its various niche, it has also successfully diversified its revenue streams from the meat industry. HRL two main flagship brands are Spam and Skippy which both shows great international potential. Throughout the year, HRL has been able to grow through innovation of its own product line and by adding strategic acquisitions with added-value products. Hormel Foods has the capacity to introduce new products or acquired products through its vast distribution network.
I like that HRL’s management team is able to take action in order to diversify the company’s product offering. While they have successfully created other niche markets outside the meat industry, they also made the wise decision of offering healthier products. This should be a very good growth vector for the future and will support higher prices for HRL stock. If management is able to keep their promise (expect revenue growth of 5% and 10% EPS for the years to come), Hormel Foods will definitely be a strong holding in a dividend growth portfolio.
JOHNSON & JOHNSON (JNJ)
Johnson & Johnson is among the noblest companies on the dividend king list. It demonstrates an incredible combination of #1 and #2 brand portfolio across the world while also offering additional growth vector through its drug division. JNJ shows a diversified revenue stream model across many consumer goods and has the necessary cash flow to support a strong drug pipeline leading to sustainable cash flow creation year after year. The pharmaceutical division represents 40% of JNJ’s total revenue and is mainly concentrated around immunology, oncology & psoriasis drugs. JNJ has a strong focus on speciality drugs which shows stronger pricing power and are harder to replicate once patents expire. This gives more time to JNJ to capitalize on their products.
JNJ shows both stock appreciation potential and strong dividend growth. This is the perfect model of a recession-proof business with enough growth vector in their portfolio to boost sales year after year. An investment in JNJ will bring its shareholder a healthy and increasing dividend payment at the same time at considerable stock appreciation over the long haul.
I doubt Coca-Cola needs presentation. Behind the iconic and one of the world largest brand names, KO has also built an impressive and efficient distribution network across the world. Its strong relationships with merchants enables the company to distribute new products or acquired products to more than 100 countries rapidly. Being the world’s largest beverage manufacturer also opens the door to better pricing power and large economies of scale that is impossible to replicate from other competitors. KO is slowly but surely diversifying its product offering through healthier beverages as carbonated drink consumption is slowing down in industrial countries. On the other hand, the consumption level in emerging markets is still low and shows lots of room for improvement.
Coca-Cola could be presented as a merchandise ship continuing its course no matter the weather. It will never be a flying high stock anymore, but the consistency of its dividend payments and its incredible growth rate (the KO dividend doubles on average every 10 years) are solid enough to make KO a key investment in your holdings. Further acquisitions and continuous emerging market development will continue to support growth in a long term horizon.
LANCASTER COLONY (LANC)
Lancaster Colony Corporation is a manufacturer and marketer of specialty food products for the retail and food service markets. Lancaster Colony is the parent of the well-known and well-established T. Marzetti Company. The company reported $1.1 billion in sales across seven states. In addition to its retail food product, LANC also delivers products to 20 of the top 30 restaurant chains in the U.S. Lancaster Colony is also growing through acquisitions. Its latest move was to purchase Flatout Bread in 2015. The company shows an interesting balance between retail sales (51%) and food service (49%). The frozen food sector in the retail business is its main market with 43% of its total sales. Lancaster Colony products can be found pretty much anywhere in a grocery store from frozen products to deli and bakery department.
LANC is still showing the size of a company that can offer sky rocketing returns in the upcoming years. I’m not sure it’s feasible since the company performed so well over the past 10 years, but it is also an example of what shares of LANC could generate in your portfolio. Since the dividend yield is fairly low, additional capital growth is expected to make it an interesting investment.
Lowe’s is the second-largest home-improvement retailer in the world with over $59 billion in annual revenues. Strong from its position in the U.S., Lowe’s benefits from the recent rebound of the world’s largest economy. LOW is also expanding through acquisitions as management recently closed the purchase of Rona in Canada. Lowe’s doesn’t only focus on selling you home renovation and improvement products, it also uses their experienced salesforce to provide you with additional advice. This good advice builds a stronger bond between the customer and the company, and it also leads to several cross-selling opportunities. The company has also successfully built a solution-based segment within its stores. This division basically answers all customers needs for bigger projects such as bathroom renovations, outside patio construction, etc. By offering a complete solution from start to finish, Lowe’s make sure to “capture” the customer for its entire project purchases.
Focus on a recovering U.S. economy and additional growth from acquisitions should continue to push LOW’s stock price higher. Its strong brand and the way it helps its customers to go through bigger projects by offering a “one-stop-shop-&-advice” service will secure LOW’s market share and improve margins over the long haul. Lowe’s has been able to transform a simple home product store into a great service offering for home projects. There is definitely more room for growth in the upcoming years.
3M CO (MMM)
By becoming the leader in R&D in many sectors and offering efficient products that work, 3M has created a unique economic moat that can’t be matched by its competitors. Their reputation for world class products have built bonds with their customers for both residential and industrial clients. Throughout its long history, management teams have also focused on providing great value to shareholders. 50% of its sales are represented by consumable products leading to never ending cash flow creation for the company. MMM grows through 3 different strategies where they spend lots of money on R&D to create new products, they use $2 billion annually for acquisitions and they also have a core portfolio of products growing each year.
3M’s competitive advantages are legendary. Industrial clients are reluctant to abandon such a world class company for any competitors as they know MMM will deliver quality products. Consumers continue to buy post-its again and again as the product is well designed, well known and, most importantly, works perfectly. 3M shows one of the strongest business models among the dividend kings and its dividend growth potential will continue to be one of its most interesting characteristics for investors.
Founded in 1954, Nordson engineers, manufactures and markets differentiated products and systems used for precision dispensing and control of adhesives, polymers, coatings, lubricants, sealants, fluids and biomaterials, with related products for testing and inspection, and surface treatment. In other words, Nordson is a small 3M co. In fact, it is 20 times smaller. They are present in 30 countries and their principal facilities are located in Brazil, Germany, India, Japan, the Netherlands, the People’s Republic of China, Thailand, the United Kingdom and the USA. The company uses most of its cash flow (46% of cash from 2011-2015) to acquires smaller business and integrate them to their model. The other great portion of its cash flow is to reward shareholders through dividend payments (8%) and share repurchase (32%). This is probably the reason why the stock price jumped almost 100% over the past 10 years (vs the S&P 500 at +70%).
Investing in a relatively small and swift company paying dividends for over half of a century is quite unusual. An investment in NDSN is an investment in a low yielding stock that will not let you down. If you keep it for a long time horizon, NDSN’s yield will gradually improve and its stock value will also generate a boost in your portfolio. This may not be the regular income producing share you are looking for, but the long haul looks quite promising for NDSN.
NORTHWEST NATURAL GAS (NWN)
Northwest Natural Gas is pretty much a self explanatory title for this company. NWN is a small utility with a market cap of 1.75B operating in Oregon and a part of Washington state. The company serves slightly over 700,000 customers in this region. The stable demand of natural gas in this region make it a “no-worry” stock where continuous cash flow comes in repetitively. The main downside of such a business model is that it is quite hard for management to present a growth vector for the future. I guess the strong base of NWN lies in its 157 years of business history doubled with a 60 consecutive year dividend increase streak. This is usually enough to gain investors’ attention.
I see an investment in NWN as a good bond. The stock delivers a yield around 3% and the company has still managed to perform as well as the S&P 500 over the past 10 years. That makes it an investment better than any bond on the market with about the same overall risk. You can understand I’m not a fan of this company, but still, I can appreciate the investment of a safe and increasing dividend payment.
Parker-Hannifin is another industrial player manufacturing various parts to industrial buyers. The company is divided into two segments; aerospace covering both military and commercial aircraft manufacturers and diversified industrial where PH sells its other parts through an independent distributor network trained by Parker-Hannifin. Both segments represent about 50% of revenue. The company specializes in highly technical parts, aftermarket parts and services. As is the case with many industrial companies, PH’s financial performance relies on various cyclical markets. For example, PH revenues were affected lately by the slowdown of the natural resources industry.
PH’s stock price has been hurt since its highs of 2014 and 2015, it is definitely a good time to buy more of this dividend king. The company shows a strong business model based on highly skilled employees advising customers. By continuously investing in their R&D, they contribute to building a solid brand where clients are less likely to shop elsewhere. For existing clients, the switching cost becomes too important leading to a very stable core business. Parker Hannifin is definitely a strong company to consider for the long haul.
PROCTER & GAMBLE (PG)
Procter & Gamble is the world’s largest household and personal care manufacturer. Management has made a bold decision to get rid of 100 brands and keep its strongest. With a leaner portfolio of 65 brands, the company has gained flexibility in its product offering and is more focused on generating growth for the future. These brands are world leading products with 21 brands generating between $1 and $10 billion dollars in sales annually and 11 with $500 million to $1 billion in sales. Basically, owning shares of PG is like owning shares of 65 different companies. Because of its size and quality of its products, PG is a key player for many retailers and it offers a guarantee of stability on their shelves. PG has obviously benefitted from emerging markets growth as well over the past decades.
It will be hard for PG to bring additional stock value growth year after year as the stock price is already expensive. An investment in PG is more like an investment in a very safe bond paying a very good interest rate (3%) and coming with a potential upside over the long haul. Since you can’t find bonds paying a 3% interest rate and increasing it each year on top of providing some value appreciation over time, I think PG is the best bet for many conservative portfolios.
Vectren is a utility business providing gas and/or electricity to more than one million customers in adjacent service territories that cover nearly two-thirds of Indiana and about 20 percent of Ohio, primarily in the west-central area. The company had sold its coal division in 2014 leaving them with a cleaner operation (not to count that the coal industry is not doing so well). 80% of its business comes from natural gas and electricity services while the other 20% is divided among infrastructure services (pipelines) and other energy services. Management plans for 65% of its utility revenues will come from natural gas by 2020 (vs. current contribution being 45%). Utility revenues includes 67% of sales from residential use and 23% from commercial clients.
If you are looking to build a core income generating portfolio, VVC should probably be on your list. Management has successfully brought back a high payout ratio (nearly 95%) to a more reasonable level (68%) and offers a 3% yield. The dividend is safe and will continue to increase over time. However, do not expect much stock value appreciation in the future as growth vectors are limited to the state’s economic potential. Still, a good check each quarter is never a bad thing.
You like Dividend Kings and you want to build your own dividend growth portfolio?
We all ask ourselves the same questions…
Which stocks to buy?
When to sell them?
How to diversify?
How to find the time to manage my portfolio?
I’m not exactly following the buy & hold strategy recommended by many dividend investors. I like to build a core portfolio of stocks I would probably never sell but I also like trading a few more stocks in and out to make a healthy profit. Imagine if you could still invest actively in individual stocks while building a rock solid portfolio. Imagine if you could use the fundamental principles of investing without getting bored or having to read hundreds of pages of stock research.
Dividend Stocks Rock (DSR) follows the same dividend growth model I use to manage my own portfolio. I didn’t come up with these investing rules out of the blue. Each rule has been written after these four years of trading dividend stocks, reading through many financial research publications and listening to top investors and portfolio managers’ wisdom.
Principle #1: High Dividend Yield Doesn’t Equal High Returns
Principle #2: Focus on Dividend Growth
Principle #3: Find Sustainable Dividend Growth Stocks
Principle #4: The Business Model Ensure Future Growth
Principle #5: Buy When You Have Money in Hand – At The Right Valuation
Principle #6: The Rationale Used to Buy is Also Used to Sell
Principle #7: Think Core, Think Growth