Like Passive Income? Then You'll Love These 3 Dividend Kings

Dividend Kings are companies that have paid and raised their dividends for at least 50 consecutive years. Raising a dividend year after year regardless of the economic cycle is a tall order.

In order to pay a larger dividend, a company has to grow earnings and free cash flow (FCF). Most Dividend Kings have a track record of steadily improving their earnings while also maintaining a strong balance sheet that provides the flexibility needed to navigate market cycles.

Emerson Electric (EMR 0.27%) Illinois Tool Works (ITW 0.05%), and Stanley Black & Decker (SWK 0.99%) are three Dividend Kings worth buying now. Here's why.

Image source: Getty Images.

Emerson Electric's focus on automation is likely to work

Lee Samaha (Emerson Electric): The industrial company's management is in a hurry, and its destination is automation and its associated markets. Following a slew of divestitures, including selling a 55% stake in its climate technologies business, Emerson is now playing offense with its bid to buy automated test and measurement systems company National Instruments. 

CEO Lal Karsanbhai intends to focus on the company automation and its associated markets of industrial software (Emerson owns a 55% stake in industrial software company Aspen Technology), test and measurement (where the National Instruments bid comes in), factory automation, and smart grid solutions. 

These moves make sense, as prospects for growth in automation spending look excellent. Not only does automation enhance productivity, it also helps solve the problem of reducing the supply chain complexity that has beset the economy in recent years. For example, instead of locating a production plant in a far-flung corner of the world due to relatively low labor costs, relocating the plant closer to customers or where supplies are more readily available is possible. 

In addition, significant advances in industrial software and digital technology enhance the value added by automation. Therefore, if Karsanbhai is successful in his attempts, then Emerson Electric has a bright future ahead, and investors can expect its dividend (current yield of 2.5%) to grow accordingly. 

Illinois Tool Works is built to last

Daniel Foelber (Illinois Tool Works): Illinois Tool Works (ITW) is one of those industrial conglomerates that does just about everything. The company is uniquely diversified across seven segments, as well as geographically diversified with global exposure.

ITW isn't overly reliant on any single segment or region. Although many of the end markets that ITW serves are cyclical, its business model leaves it far more resistant to ebbs and flows in the business cycle than pure-play companies. 

Looking at ITW's 2022 performance, we can see that each segment makes up between 10% and 20% of revenue, and between 10% and 20% of operating income. It's hard to find an industrial company of ITW's size with that level of top- and bottom-line diversification.

Data source: Illinois Tool Works. 

ITW has bold long-term performance targets, which include a 28% operating margin, 4% to 5% annual organic growth, 9% to 10% annual earnings per share (EPS) growth, and a 50% dividend payout ratio.

A 28% operating margin is a lofty goal for a company that has historically posted an operating margin in the low 20% range. However, ITW is slowly but surely improving its profitability. The company achieved a 23.8% operating margin in 2022. 2023 guidance points to an operating margin of 24.5% to 25.5%. Even the low end of the guidance would be the highest operating margin in decades.

ITW Operating Margin (Annual) data by YCharts

ITW's 2023 EPS guidance of $9.40 to $9.80 gives it a forward price-to-earnings ratio of 24 -- an expensive valuation for a low-growth company. However, ITW arguably deserves a premium valuation given its diversification and history of cash flow growth that supports buybacks and dividend raises.

ITW isn't a screaming buy now. But it's a Dividend King with 52 consecutive years of dividend increases that is worth buying and holding or at least adding to a watchlist. 

Build a stronger passive income stream with Stanley Black & Decker

Scott Levine (Stanley Black & Decker): From novice DIYers to industrial machinists, there's a strong chance that these workers are tackling their projects with tools and equipment that comes from one of Stanley Black & Decker's leading brands. Since 1843, Stanley Black & Decker has developed an expansive portfolio of tools, making it one of the leading manufacturers of tools and equipment.

With regards to dividends, Stanley Black & Decker's history is impressive. The company has rewarded shareholders with a dividend for 146 years in a row, raising it in each of the past 55 consecutive years. Currently, the stock offers investors an enticing forward dividend yield of 4% -- it's one of the highest-yielding Dividend Kings out there.

While many will be drawn to Stanley Black & Decker for its steadfast commitment to returning capital to shareholders, cautious investors may balk at the high yield, fearing that management may be risking the company's financial well-being to placate investors. This is hardly the case, though. Over the past 10 years, Stanley Black & Decker has averaged a conservative payout ratio of 46%.

Last year was a challenging one for the company due to supply chain disruptions and other factors. Consequently, it reported 2022 earnings per share of $6.76, a notable decrease from the $10.16 that it reported in 2021. While the company may see earnings decline in 2023, management has a plan that it's implementing to turn things around, including a plan to reduce expenses by $500 million in 2023.

For patient investors with the stomach to withstand near-term volatility, Stanley Black & Decker is an industrial stalwart that can be a nice addition to a dividend portfolio.