What are Dividend Kings?
By: Ned Piplovic,
What are the dividend kings?
Dividend Kings is a description of S&P 500 companies with extraordinarily long records of consecutive annual dividend hikes.
The specific requirement for qualification for this elite group of dividend-paying companies is simple. To earn the Dividend Kings moniker, an S&P 500 company must have a market capitalization of more than $3 billion and a record of raising annual dividend payout amounts for at least 50 consecutive years.
Dividend Kings is just a subcategory of the Dividend Aristocrats designation that has the same market-cap requirement for S&P 500 companies but requires only 25 consecutive years of annual dividend hikes.
What are the benefits of investing in Dividend Kings companies?
An analysis of historical performances indicates that public companies which pay rising dividends reward their shareholders with higher overall returns over extended periods, as well as experience lower volatility over a long-term investment horizon. However, regardless of these back tested results, financial and investing professionals stand in disagreement regarding whether dividend distributions contribute at all to the company’s overall long-term total returns.
Long-term distribution of rising dividend income generates a steady cash flow for investors and the rising dividend compensates – and hopefully exceeds – any inflationary effects over long-time horizons.
More than just providing a steady dividend income, long-term rising dividend payouts usually indicate a well-managed company that generates sufficient earnings to cover its increasing dividend distributions and sustainable dividend payout ratios.
The lowest payout ratio in the current group of Dividend Kings is 28% and the highest current payout ratio is just shy of 80%, with a simple average of 54% for the entire group.
Any of the current Dividend Kings are potentially good investment choices for generating dividend income over extended periods. However, while some companies decide their dividend distribution amounts based on their quarterly results as they go along, some of these have specific dividend growth policies, which offer investors assurances that the company will take under consideration the targeted dividend hike when creating its annual budgets and plans.
Additional long-term advantages of investing in Dividend Kings
Dividend Kings manage to enhance their annual dividend payouts year-after-year, which is more than just an indication that these companies have sufficient earnings and cash flow to support the growing payouts. The decades of rising dividend distribution signal that these companies are dynamic and adapt well to changing market conditions. Effectively navigating the boom-bust business cycle, financial crises, financial bear markets and other obstacles that occur over decades also indicate that these companies are able to withstand challenging market conditions. Any company that manages to navigate effectively multiple financial storms and rough markets, while managing to enhance its annual dividends every year, is well-managed and investors can expect sound long-term asset appreciation, as well as a steadily rising dividend income.
Dividend Kings: 50 years of annual dividend boosts
The Dividend Kings is an exclusive group of only 16 companies for 2018. While there are 10 additional companies that have boosted their annual dividends for 50 years or more, only 16 companies meet the additional criteria of minimum market capitalization and inclusion in the S&P 500 Index. To illustrate the selective criteria for Dividend Kings, consider that lowering the minimum number of years for paying dividends to 25 years – as it is for Dividend Aristocrats – expands the list of companies to 53. Further lowering the cut-off by five years to 20 consecutive annual dividend hikes triples the number of companies that meet the criteria to more than 150.
In addition to the Dividend Kings and Dividend Aristocrats designations for the two top-tier groups, some analysts also compile lists of so-called Dividend Achievers or Dividend Challengers – companies with 10 or more years of consecutive dividend hikes. Furthermore, companies with five or more consecutive dividend boosts occasionally carry the Dividend Contenders label.
Dividend Kings: The Sweet 16
The 16 companies currently designated as Dividend kings come from six different market sectors. While Consumer Discretionary, Consumer Staples and Industrials sector carry the same 25% share based on number of companies, the shares are quite different if we use the share weighted by market capitalization. After that adjustment, the companies from the Consumer Staples account for more than a third of total market capitalization share and a single health care company jumps to second-highest share with more than 27%. The table below provides full details.
The second table below provides a full list of the current Dividend Kings and few additional measures, such as share prices – as of closing on September 17, 2018 – annual dividend amounts, dividend yield, dividend payout ratio, etc.
Dividend Kings certainly have impressive records of enhancing annual dividend payouts over long periods. However, a single criterion analysis could provide false indication. Therefore, investors interested in these companies must also evaluate additional metrics. The lowest dividend yield in the group is currently 1.7%, which is lower than dividend income investors generally seek. Furthermore, the dividend payout ratios for more than half of the companies currently exceeds the 50% level, which is generally considered as the upper limit for a sustainable payout ratio.
The list of the16 companies currently designated as Dividend Kings offers an easy way for investors to identify mid-cap and large-cap companies with longstanding annual dividend hikes, as well as a demonstrated capability to provide a steady source of dividend payouts for income-seeking investors. However, interested investors should evaluate the full spectrum of financial metrics, such as share-price trends, price-to-earnings (P/E) ratios, moving averages, dividend payout ratios, etc.
Investing in other equities with higher returns might yield superior performance over shorter periods. However, that strategy generally requires active investor involvement, high-level analytics tools and frequent trading that commonly only active traders and professional investors can afford. Furthermore, high-frequency trading generates additional fees that diminish total returns over extended periods and high-yield equities generally incur added volatility and carry higher risk exposure.
Therefore, investors looking for long-term portfolio growth – especially retirement investors and investors seeking a supplemental source of secondary income who do not have the time and resources to spare for complex analytics and trading – could be best suited to invest in Dividend Kings. These investors could allocate a portion of their portfolio to take a long position in few or all of the Dividend Kings and enjoy long-term asset appreciation and dividend income with just periodic maintenance of their portfolio mix – such as an annual rebalancing.
Investors still can use a portion of their portfolio to seek more speculative investments with higher risk exposure for potentially outsized gains. However, their investment portfolio should be balanced on the other side with long positions in stable companies – like the Dividend Kings – that provide low-risk, long-term capital growth complemented with steadily rising dividend income payments.
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Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.