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5 Dividend Kings Built for the Long Term

By Neha Chamaria – Updated Apr 24, 2019 at 12:20AM

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These income stocks aim to ring in strong cash flows for years to come to better reward shareholders.

Dividend Kings are companies that have increased their dividends every year for 50 consecutive years or more. Building that kind of a track record is far from easy, for companies should not only have rewarded shareholders through downturns, they should also ensure they didn't just maintain but boosted their dividend payouts further every year, even if business conditions were to worsen.

Not surprisingly, only 25 companies have made it to the coveted Dividend Kings list today. Among these, I believe the five top Dividend Kings you'd want to buy now and hold for a really long term are American States Water (AWR 0.74%), 3M (MMM 1.43%)Emerson Electric (EMR 1.48%)Parker Hannifin (PH 1.96%), and Procter & Gamble (PG 0.31%). There's a common thread to all five Dividend Kings: Each is a solid free-cash-flow (FCF) generator and converts a major portion of net income to FCF, which also holds the key to dividend growth.

This Dividend King should keep getting better

Check out the latest American States Water earnings call transcript.

American States Water has the longest dividend growth streak among not just the Dividend Kings but all publicly listed companies: Last year, the utility raised its dividend for the 64th consecutive year. That impeccable record proves the company has a lot going for it.

American States Water provides water services to nearly 259,000 customers, as well as electricity to roughly 24,000 consumers. That aside, it also serves 11 military bases under 50-year contracts with the U.S. government. Now this is where its growth potential lies. You see, while its base water utility business is a steady cash flow generator, potential privatization of military bases and the subsequent awarding of water service contracts in coming years could mean big opportunities for American States Water.

Plant shoots beside stacks of coins depicting income growth.

Owning Dividend Kings is a great way to boost your dividend income. Image source: Getty Images.

For now, American States Water aims to grow dividends at a five-year compound annual rate of at least 6% in the long term. That should be an easy goal for the company given the resilient nature of its utility and the growth potential in its military business. American States Water's dividend yield of 1.6% is a tad disappointing, but stable and growing dividends should reap rich returns for shareholders in the long run.

Time to overlook near-term challenges

Check out the latest 3M earnings call transcript.

If you've ever used a Post-it Note or Scotch tape, you've used a 3M product. If that makes you think of 3M as a consumer products company, consider that it owns seven brands, manufactures and sells more than 60,000 products, and serves at least 12 major sectors and industries including energy, healthcare, transportation, electronics, and manufacturing. Its diversification partly explains why 3M has been able to grow cash flows steadily and increase dividends every year for 60 consecutive years now.

2018 turned out to be a tough year for 3M, but the company's recently announced five-year financial plan holds promise, especially for dividend lovers: The company expects to grow earnings per share by 8% to 11% and convert 100% of the net income it earns over the period into FCF. As dividends are paid out of FCF, investors in 3M can look forward to higher dividends from the company with each passing year. Last year, 3M raised its dividend by 16% for the 60th straight year, joining the league of the few companies to have raised dividends for six decades or more.

Investors who've been wary of 3M's recent operational performance needn't worry about dividends, though, as the company remains committed to shareholders and continues to generate strong cash flows to back its goals. 3M's next dividend hike is just around the corner, so watch out for it while you enjoy a decent 2.8% yield.

This future trend could fetch you big dividends

Check out the latest Emerson Electric earnings call transcript.

Emerson Electric is an incredibly interesting company given the two distinct businesses it runs: automation solutions and commercial and residential solutions. Between the two, the company serves nearly every key industry you can think of.

Automation is where all the action should be in coming years, and that's where Emerson's focus lies. In 2017, for instance, Emerson made one of its biggest acquisitions -- of Pentair's valves and controls business for $3.15 billion -- to give its automation business a boost. Last year, aside from smaller acquisitions, Emerson acquired Aventics and Textron's tools and test equipment business for a combined value of nearly $1.4 billion. Aventics specializes in smart pneumatics technologies and should strengthen Emerson's foothold in fluid automation solutions, a market estimated to be worth nearly $13 billion.

Oil pumps silhouetted against a sunset.

Emerson Electric's fluid control and pneumatics solutions have wide applications in industries like oil and gas. Image source: Getty Images.

During its fiscal year ended Sept. 30, 2018, Emerson Electric's automation solutions sales grew 21%, or 10% excluding acquisitions and foreign exchange fluctuations (also known as underlying sales). For FY 2019, Emerson expects automation underlying sales to grow 5% to 8% and company EPS by 5% to 9%. It further aims to generate operating cash flow worth nearly $3.2 billion and convert all of it into FCF this fiscal year.

By 2021, Emerson expects to have grown its EPS to $4.50, or nearly 30% higher from its FY 18. Income investors can rest assured this should mean higher dividends as well, given Emerson's 62-year streak of consecutive annual dividend increases. The stock's 3% dividend yield further adds to its appeal as a Dividend King.

This little-known Dividend King has solid potential

Check out the latest Parker Hannifin earnings call transcript.

Despite an incredible 62-year dividend increase streak, Parker Hannifin is an oft-overlooked Dividend King. Part of it may have to do with its seemingly boring business: Parker Hannifin specializes in motion and controls technologies, or simply technologies that move machines, such as filtration, hydraulics, pneumatics, fluid and gas handling, and electromechanical systems, among others. The company last hiked its dividend by a good 15% in 2018, and the stock currently yields 1.9%.

Parker Hannifin is firing on all cylinders, having delivered record numbers in fiscal 2018 and setting itself up for another great year at a time when most industrial companies are battling growth headwinds. Parker Hannifin's sales jumped 19% to $14.3 billion, and net income surged 8% in FY 2018 (ended June 30, 2018) as orders from both its segments, diversified industrial and aerospace systems, grew.

Notably, Parker Hannifin generated greater FCF than net income and used the cash prudently to pare down debt while raising dividends and repurchasing shares. Parker Hannifin recently upgraded its FY 2019 adjusted earnings guidance to $11.10 to $11.70 per share, representing nearly 9% upside at the midpoint from FY 2018. Management foresees record sales and earnings for the year.

Parker Hannifin's five-year financial goals give income investors better visibility of what to expect. Among other things, the company expects to grow earnings per share at a compound annual rate of 10% or more and convert 100% of its net income into FCF through 2023, which should mean bigger dividends in the years to come.

This consumer giant won't disappoint you

Check out the latest Procter & Gamble earnings call transcript.

Procter & Gamble has been around for 180 years and sells products in as many countries across 10 product categories and 65 brands, including iconic ones like Olay, Gillette, Pampers, Bounty, and Tide. In fact, this is the "smaller" version of P&G that you see today, what with the company shrinking dramatically in recent years, seemingly for the better, as it dumped less profitable brands to bring down the total number from 170 to 65.

P&G's sales, therefore, appear to be finally picking up after some tough years. In the long run, the company aims to grow organic sales ahead of the market and earnings per share by mid- to high-single-digit percentages, backed by global macro trends such as urbanization, which should boost demand for consumer products. Remember, we aren't yet factoring in any changes that activist investor Nelson Peltz could bring about at the company in the near term to unlock greater shareholder value.

In any case, 2019 could be a good year for P&G stock as the company increases prices to supplement strong sales volumes and continue rewarding shareholders with higher dividends. This is after having increased its dividend for the 62nd straight year in 2018. There's little reason to believe this streak won't continue, so enjoy your 3% yield while you await bigger dividends from P&G, year after year.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.

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