Dividend kings may not provide royal returns
Some investors restrict their stock holdings to “dividend aristocrats” or “dividend kings.”
Dividend aristocrats are companies that have raised their dividend for 25 consecutive years or more. Dividend kings are companies that have accomplished the same feat for 50 years or more.
It’s a myopic approach. I recently did a small study on the seven stocks with the longest streaks of dividend increases. As a group, they returned 4.75% in 2023, trailing far behind the Standard & Poor’s 500 Total Return Index at 26.29%.
Over the past five years, the seven kings I studied did better, returning 85.75% on average. Yet they still didn’t beat the index, which vaulted to a 107.21% gain.
Don’t get me wrong. I like dividends, especially rising dividends.
Yet the desire to be a dividend aristocrat or king may sometimes lead a company to strain unwisely to keep the streak alive. Sometimes, profits would be best directed to research and development, building new factories, or buying back stock, rather than paying dividends.
Kings falter
Here are the seven stocks that have been dividend kings for the longest time — 67 to 69 years — along with their 2023 return and five-year return, 2019-2023. (Sources: Gurufocus.com, Ned Davis Research)
American States Water Co. (AWR), 69@BD body J bullet:2023 return: -13.11%
Five-year return: 19.96%
Dover Corp. (DOV), 68@BD body J bullet:2023 return: 15.25% Five-year return: 134.82% Northwest Natural Holding Co. (NWN), 68@BD body J bullet:2023 return: -14.45% Five-year return: -22.57% Procter & Gamble Co. (PG), 67@BD body J bullet:2023 return: -0.85%
Five-year return: 80.98% Parker Hannifin Corp. (PH), 67@BD body J bullet:2023 return: 60.79%
Five-year return: 235.84% Emerson Electric Co. (EMR), 67@BD body J bullet:2023 return: 3.76%
Five-year return: 85.24% Genuine Parts Co. (GPC), 67@ BD body J bullet:2023 return: -18.13%
Five-year return: 66% Standard & Poor’s 500 Total Return Index@BD body J bullet:2023 return: 26.29% Five-year return: 107.21% As this mini-study shows, four of these seven leading dividend king stocks declined in 2023. Only one of the seven, Parker Hannifin Corp., beat the index.
For the five-year period, two of the seven kings — Parker Hannifin and Dover Corp. — beat the index. The other five kings couldn’t do it.
My little study was very limited.
But the Standard & Poor’s has taken a longer and deeper look. It tracks all the dividend aristocrats in the S&P 500. Over the 10 years through Feb. 16, they were up 8.18% per year, while the whole S&P 500 returned 10.53% per year.
Kings I like
Though I wouldn’t restrict my investment focus to dividend aristocrats or dividend kings, I do recommend a handful of them. Presently, there are 48 dividend kings. I think seven of them look attractive, and I own one.
Emerson Electric Co. (EMR), one of the seven kings listed above, looks cheap to me at less than six times earnings. Over the past decade, it has usually sold for about 19 times earnings.
Cincinnati Financial Corp. (CINF) sells home, auto and business insurance. A few insiders have been nibbling at the stock, which sells for less than 10 times earnings.
Johnson & Johnson (JNJ), the giant health care company, is selling for about 13 times earnings, which is close to the lowest valuation in a decade.
ABM Industries Inc. (ABM) provides janitorial, engineering and parking services for commercial buildings and stadiums. It also does car maintenance for rental-car companies. Earnings have grown at a 14% clip the past five years.
Commerce Bancshares Inc. (CBSH), based in Kansas City, Missouri, is a large regional bank in the Midwest. It is unloved on Wall Street: Eleven analysts follow it, and not one recommends it. But its operating results look solid to me.
National Fuel Gas Co. (NFG) is a natural gas company based in Williamsville, New York. Its industry has been struggling and the stock has been a laggard. But it yields more than 4% in dividends.
Nucor Corp. (NUE) is the country’s largest steel producer. It has a handsome return on stockholders’ equity, more than 22%. The stock sells for about 10 times earnings, versus a historical average of about 17.
In perspective
I view a stock’s status as a dividend king or aristocrat as an advantage — but a minor one.
When considering dividends, the two things I care most about are the dividend yield (the dividend as a percentage of the stock price) and the dividend growth rate over the past five years or so.
In addition, there are key factors that have nothing to do with dividends, such as a stock’s valuation ratios (stock price compared to earnings, book value or revenue per share) and the company’s profitability.
Disclosure: I own call options on Nucor in a hedge fund I run, and also own the stock personally. I own Johnson & Johnson for some clients.