Income investors often ask "who are the dividend kings?" They're indisputably the best and the safest dividend stocks you can buy because dividend kings are companies that have increased their dividends every year for the last 50 consecutive years or more, which means growth, stability, and reliability -- the three keys to successful dividend investing. They're the safest because companies that have come as far as increasing their payouts for five decades are least likely to cut dividends.

Having paid uninterrupted and growing dividends for such a long time, these companies exhibit the highest qualities of resilience, discipline, and commitment, all of which are also essential attributes of a king, hence the befitting name.

The extraordinary 50-year streak of dividend increases also means that dividend kings are one notch above the more popular S&P Dividend Aristocrats. Both groups are comprised of dividend growth stocks, or companies that have consistently grown earnings and cash flows to support a higher payout, year after year. The focus here, therefore, is less on dividend yield and more on the rate of dividend increases and payout ratio, both of which are key criteria for any investor when selecting dividend stocks. While a high yield can be enticing, investing in top dividend growth stocks like dividend kings could fetch you big returns in the long run. 

So, what does it take for a company to make the cut as a dividend king? A lot, if you might.

What makes a dividend king

If you invest in a stock for the dividend, you'd not only want to be paid consistently, but you'd also expect your dividend income to rise with time. That's possible in two ways: You buy more shares to boost your total dividend income, or the company rewards you with regular dividend increases so you take home more money with the same number of shares. The latter, of course, is a more meaningful way to grow your income, which is why dividend kings are such powerful wealth-compounding tools. 

Coins stacked like a king on a chess board.

Dividend kings are among the best and safest dividend stocks income investors can buy. Image source: Getty Images.

To be able to increase dividends every year for decades, even during the deepest of business downcycles, a company must possess the following attributes:

  • A sustainable and compelling business model.
  • A strong economic moat.
  • Financial fortitude.
  • Efficiency in capital allocation.
  • Commitment to shareholders.
  • Visionary management.

Financial fortitude and efficient capital allocation are, perhaps, the most important yet underrated factors that decide how consistent a company's dividends can be. While a visionary management should be able to exploit competitive advantages and growth catalysts to drive the company's top and bottom lines, a strong balance sheet and prudent capital allocation are imperative to support higher payouts and avoid putting dividends on the chopping block to service debt or fund growth projects if business conditions were to worsen.

That's exactly where General Electric (NYSE:GE) faltered. While the megaconglomerate was never a dividend king, it had raised its dividends for 32 consecutive years by 2007. Soon after, a financial crisis forced GE to slash its dividend in 2009 for the first time since 1938. If that wasn't bad enough, an unsustainable payout ratio and an unhealthy balance sheet, replete with a high debt load and low cash flows, forced GE to cut its dividend again in 2017. 

Situations like that of General Electric's are few and far between, but the example proves how even the most dependable dividend stocks can flounder if financials are overlooked. Clearly, becoming a dividend king and maintaining that status is no cakewalk, which is why although there are hundreds of companies that have been around for decades, only a couple of dozen stocks are dividend kings today. All of them are typically large, established, and mature companies that have stood the tests of time and display unwavering commitment to shareholders.

The only other stocks that come close to displaying such dividend discipline are the Dividend Aristocrats and dividend champions, with some of them on their way to becoming dividend kings.

Dividend kings vs. Dividend Aristocrats vs. dividend champions

With so many companies paying a dividend today, income investors are spoiled for choice. Investors can choose high-yielding stocks with dividend growth to generate compound returns. While it's easy to find high-yielding stocks using a standard stock screener, the classification of companies into groups such as dividend kings, Dividend Aristocrats, and dividend champions has also simplified dividend growth investing to a great extent.

The three dividend terms are often thrown around casually and even used interchangeably. However, while all three groups are comprised of stocks with a strong history of dividend increases, there are subtle differences between them that every income investor should know.

Dividend kings
A dividend king is a company with a record of at least 50 years of consecutive dividend increases. That means dividend kings have twice as good a record as Dividend Aristocrats, making them superior in terms of dividend longevity and reliability.

Dividend Aristocrats
Dividend Aristocrats are S&P 500 companies that have increased their dividends consecutively for 25 years or more. Put another way, once a company becomes a Dividend Aristocrat, it'll require another 25 years to become a dividend king, which is why I consider dividend kings to be the epitome of safe dividend stocks.

Dividend kings, however, are not officially tracked. On the other hand, the list of Dividend Aristocrats is compiled by Standard & Poor's, which launched the S&P 500 Dividend Aristocrats Index in 2005 to measure the performances of S&P 500 companies that have a 25-year-plus record of dividend increases. There are also Dividend Aristocrat exchange-traded funds (ETFs) for investors who want exposure to a basket of stocks without spending time and effort on research.

The S&P tag and an index to track their performances is perhaps why Dividend Aristocrats are more popular among income investors. Comparatively, it's harder to find a list of dividend kings, and there's no dividend king ETF or index fund to track the group.

There's also another group of stocks you should be aware of: the dividend champions.

Dividend champions
Dave Fish of the DRiP Investing Resource Center defines dividend champions as "U.S. companies with [25-plus] straight years higher dividends." At first blush, that sounds exactly like the Dividend Aristocrats, but again, the difference is that dividend champions need not necessarily belong in the S&P 500.

Dividend champions, therefore, can be considered the biggest group of dividend growth stocks as it doesn't filter out dividend-paying companies with long streaks on the basis of market capitalization or liquidity. As of Fish's last updated list, there are 120 dividend champions. Comparatively, there are only 53 Dividend Aristocrats per the S&P 500 Dividend Aristocrats Index, and only 25 dividend kings.

Top 10 dividend kings by yield list 

Though dividend kings don't usually have high yields, income investors often want to find the top dividend kings by yield. I don't blame them. After all, who doesn't want the best of both worlds: dividend growth and a good dividend yield?

So, below is a list of the top 10 dividend kings by yield. A point to note is that the highest-yielding dividend kings may not necessarily have grown their dividends at the fastest pace, which is why I have included the 10-year dividend compound annual growth rate (CAGR) data for each stock to give you a broader view. 

Dividend King Current Yield 10-Year Dividend CAGR Payout Ratio (TTM)
Procter & Gamble  3.9% 7.7% 72.2%
Coca-Cola 3.5% 8.1% 440.7%
Federal Realty Investment Trust  3.5% 5.3% 97.6%
Genuine Parts Company 3.1% 6.3% 62.7%
Northwest Natural Gas 3.1% 2.7% NA*
Cincinnati Financial Corporation  3% 3.5% 49.6%
Emerson Electric  2.7% 6.2% 69%
3M Company
(NYSE:MMM)
2.7% 9.4% 70.4%
Colgate-Palmolive Company 2.7% 8.6% 73.6%
Johnson & Johnson 2.6% 7.4% 724.9%

TTM: Trailing 12 months. NA = Not applicable as Northwest Natural Gas incurred a loss per share in TTM primarily because of tax implications. Data sources: YCharts and Yahoo! Finance. Table by author.

Note that Coca-Cola's and Johnson & Johnson's payout ratios for the trailing 12 months are unusually high as both companies incurred substantial GAAP losses in the fourth quarter because of the recent tax code overhaul

In terms of dividend growth, only four of the above stocks -- 3M, Colgate-Palmolive, Coca-Cola, and Procter & Gamble -- feature among the 10 fastest dividend-growth kings. In other words, there are six other stocks from the dividend kings list that have grown their dividends at a faster pace than most stocks in the above table in the past decade, some even at double-digits.  

Six top dividend kings by dividend growth

Dividend King 10-Year Dividend CAGR Current Dividend Yield Payout Ratio (TTM)
Lowe's Companies  18.5% 2% 34.5%
Hormel Foods  16.3% 2.1% 39.2%
Parker-Hannifin Corp (NYSE:PH) 14% 1.7% 35.2%
Nordson Corporation  12.2% 0.9% 13.3%
Dover Corp (NYSE:DOV) 9% 2% 37.4%
American States Water (NYSE:AWR) 7.6% 1.9% 54.8%

TTM: Trailing 12 months. Data sources: YCharts and Yahoo! Finance. Table by author.

Interestingly, all of the dividend kings that have grown their annual dividends by double-digit percentages in the last 10 years also have a low payout ratio, which means there's a lot of room for them to grow dividends year after year, regardless of business conditions. 

5 best dividend kings to buy and hold forever 

While every dividend king has proven its mettle, I look for companies with strong growth catalysts, and preferably ones with set financial goals for the foreseeable future, as it provides better visibility into the company's earnings and dividend growth potential. I also prefer stocks with 10-year dividend growth of at least 6% and a payout ratio not exceeding 60% to 70%. 

With that in mind, here are five dividend kings that you could buy and hold, even for a lifetime. I've saved the best for the last, so read along.

This new dividend king is a slow and steady winner

Stanley Black & Decker (NYSE:SWK) gained entry into the prestigious dividend kings group only last year, when it increased its dividend for the 50th straight year. The company's backstory is fascinating as it has an uninterrupted dividend record of 142 years.

From a small hardware shop in 1843 to the world's leading tools and engineered fasteners manufacturer and the second-largest commercial security services company, Stanley Black & Decker has come a long way. Chances are, you've been using its products more often than you realize. Including repair tools, lawn mowers, fasteners that secure your electronic devices, and industrial components to security surveillance systems, Stanley Black & Decker's portfolio has grown to a whopping 500,000 products sold across 50 countries.

Stanley Black & Decker generated $13 billion in sales last year. Now picture this: Nearly 80% of the 175-year old company's revenue growth so far has come in just the past two decades, thanks to acquisitions. Since 2002, the company has spent $9 billion on acquisitions, including a buyout of Craftsman brand and Newell Tools last year, which contributed a combined 19% to its fiscal 2017 revenue.

In the past five years, Stanley Black & Decker's earnings per share (EPS), free cash flow (FCF), and dividends grew at compound rates of 10%, 11%, and 6%, respectively. The company grew its dividends by 7% in the past decade and paid out roughly 37% of net profits in dividends over the trailing 12 months. Management has well-defined long-term financial goals, which include:

  • Revenue: 10% to 12% growth with 4% to 6% organic growth.
  • Earnings per share: 10% to 12% growth, 7% to 9% excluding acquisitions.
  • Free-cash-flow: 100% or more of net income.
  • Capital allocation: Return 50% FCF to shareholders in the form of dividends and share repurchases, and use 50% for acquisitions.
  • Target payout ratio: 30% to 35%.

That payout target may look uninspiring, but the third point -- FCF conversion of 100% or more -- is where Stanley Black & Decker stands out. Because a company pays dividends or repurchases shares out of FCF, greater efficiency in converting net income to FCF almost always translates into higher shareholder returns. With management committed to dividend growth, income investors can expect mid to high single-digit annual raises from this low-risk dividend king.

Guess which stock has the longest dividend-increase streak?

American States Water is a great example of how beautiful boring can be. Water utilities is an oft-ignored industry, yet American States Water has the longest streak of dividend increases among publicly listed companies: a jaw-dropping 63 consecutive years. Utilities are known for their dividend-paying capabilities, mainly because contracted and regulated revenue eliminates much of the volatility associated with the top line and cash flows. American States Water is a class apart, even among utilities, thanks to its incredible dividend record. 

American States Water operates two subsidiaries: Golden State Water Company (GSCW) and American States Utility Services (ASUS). GSWC is a regulated water and electric utility that contributed 77% and 78% to the company's revenue and net income, respectively, in fiscal 2017. ASUS is a contracted water and wastewater systems provider that serves 11 military bases in the U.S. under 50-year contracts, and it accounted for 23% of American States Water's revenue last year.

American States Water's success with dividends can be credited to six broad factors:

  • A strong position in a capital-intensive industry with high barriers to entry.
  • A highly regulated and contracted business model.
  • A healthy water rights portfolio, which includes 73,600 acre-feet of owned adjudicated groundwater rights, and 11,300 acre-feet of surface water rights.
  • A stable customer base in a resilient industry.
  • A strong management team with extensive experience in utilities.
  • Strong financials and commitment to shareholders.

Between 2011 and 2017, American States Water grew its EPS and dividends at compound rates of 8% and 10.4%, respectively. In the long run, management aims to grow dividends at a compound rate of "more than 5%." I expect much higher growth from this dividend king, especially as GSWC has applied for rate increases for 2019 through 2021. If they are approved by the California Public Utilities Commission by the end of this year, as expected, the increase would bring in good incremental revenue and cash flow for the company.

Several hand, power, and construction tools and tapes scattered on a table.

3M's and Stanley Black & Decker's ubiquity and brand power make them incredible dividend kings to own. Image source: Getty Images.

A dividend king that wants to pay you more

3M is one of only eight publicly listed companies to increase its dividends for six decades. To put it in a fun way, 3M just celebrated its tenth anniversary as a dividend king. The company has paid uninterrupted dividends for more than 100 years now. Credit goes to 3M's ubiquitous products, a hugely diversified portfolio, and disciplined deployment of capital.

If 3M's name doesn't ring a bell, think Post-it notes and Scotch tape. Those are just two of the company's well-known brands. Though, 3M also owns Scotch-Brite, Scotchgard, Filtrete, Command, and Nexcare brands, among others, and a portfolio of more than 60,000 products that are sold across 70 countries today.

Above all, you have to credit 3M's innovative leadership for its success. Otherwise, who'd imagine a manufacturer of low-profile products like adhesives and tapes to become a global leader someday? In fact, 3M might be an industrials company, but its tag line isn't even close. "Science. Applied to Life" -- that's what it says. The company is living up to it, applying science and innovation to everyday products to make lives easier. Today, nearly one-third of 3M's sales come from products invented in the past five years.

3M is on target to achieve the below five-year goals through 2020 as unveiled in 2016:

Going by 3M's operational performance in 2017, it appears on target to achieve those goals. Again, 3M's target FCF conversion of 100% is the key to its dividend growth. In fact, management aims to grow dividend "in-line with earnings over time," which means, a high single-digit or even a double-digit annual dividend increase is very possible. Income investors have a lot to look forward to from this money-minting dividend king

This dividend king just took a big growth leap

Dover Corp has raised its dividend every year since it was founded in 1955 -- that's 62 consecutive annual dividend increases so far. The impressive record and a high 10-year dividend growth rate of 9% compelled me to deep-dive into the company. Dover's intriguing business mix and a recent growth move struck me.

Dover manufactures and sells equipment and components through four business segments: engineered systems (industrials and fast-moving consumer goods), fluids (pumps and filtration systems), energy, and refrigeration and food equipment. Over the years, engineered systems and fluids have grown bigger in size, contributing nearly 62% combined to the company's total sales in fiscal 2017.

Pursuant to an acquisitive strategy to growth, Dover scooped up as many 13 companies between 2015 and 2017 for nearly $2.2 billion. For perspective, Dover generated $7.8 billion in sales last year. Dover's recent move to spin off its upstream energy business into a separate company called Apergy Corp, therefore, marked a shift in strategy and reflected management's agility to recognize and work on weak spots. The spinoff eliminates a cyclical, volatile, and leveraged portion of Dover's business, giving it a chance to unlock greater shareholder value from other businesses that are on a solid footing.

Unlike the other dividend kings discussed here, Dover hasn't laid out long-term financial goals yet. Nonetheless, you just can't ignore that the company's free cash flow exceeded net income in nine out of the past 10 years. In fact, 100% or greater FCF conversion is a common theme among all of my dividend stock picks, validating the direct link between FCF and dividend growth. Dover can unlock considerable business value after the spinoff of Apergy, which, when combined with its prudent capital allocation policies, should mean solid dividend growth ahead.

The best, yet most underrated dividend king

Parker Hannifin has both a really long dividend streak and a solid dividend growth rate.  The company caught my attention recently when, while increasing its dividend for the 62nd straight year, management confirmed that maintaining a "dividend increase record" remains a "top priority for capital allocation." When Parker also updated its long-term financial goals, I knew I was looking at a top-quality dividend king here.

Parker Hannifin is the global leader in "motion and controls technologies". Jargon aside, the company makes systems and technology, mostly automated, that keep machines moving in a controlled manner. As the company says, "Parker can be found on and around everything that moves." That may not be an exaggeration, though, in the company's own words, they run into "hundreds of thousands of individual products."

Remarkably, no single product contributes more than 1%, and no single customer more than 3%, to Parker Hannifin's sales. Diversification is, therefore, a major competitive strength for the company which has broadly organized its business into two segments: diversified industrial (which includes engineered materials, filtration, fluid connectors, instrumentation, and motion systems groups), and aerospace systems.

In a significant growth move, Parker Hannifin acquired filtration products top-dog, CLARCOR for $4.3 billion last year in it largest-ever deal. This past March, they unveiled an upgraded set of financial goals through 2023. Here's what the company's aiming for by 2023:

  • Segment operating margins (excludes corporate administrative expenses, interest, and taxes): 19%.
  • Adjusted EPS growth: at least 10%.
  • FCF conversion: 100% of more.
  • Payout ratio: 30%.

From $3.9 billion in cash from operations between fiscal years 2016 and 2018, Parker Hannifin expects to nearly triple its cash flows in the next five years, which should translate into hefty dividends. In fact, the company expects to pay out $2.6 billion in dividends between 2019 and 2023 compared to a dividend outflow of only $1 billion from 2016 to 2018. Clearly, Parker Hannifin won't give up its position as a top-quality high-growth dividend king anytime soon.  

Neha Chamaria owns shares of Colgate-Palmolive. The Motley Fool owns shares of Johnson & Johnson and Nordson. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.