How to identify future Dividend Kings
A good place to start is by looking at other dividend growth indexes, such as those that track stocks with 10, 20, or even more years of payout growth. This includes those found in the ProShares S&P 500 Dividend Aristocrats® ETF.
It's essential to find companies that have already built strong, durable, and resilient businesses with long track records of growing earnings per share that can support a growing dividend.
Pros and cons of investing in Dividend Kings
Here are some of the reasons investors should consider Dividend Kings:
- Proven businesses across many economic cycles.
- History of adapting to disruption and new markets.
- Track record of earnings growth that funds higher dividends.
- Often lower volatility, making it easier to hold through market downturns.
There are also reasons to be cautious:
- Like other dividend stocks, future dividend growth is not guaranteed.
- Many Dividend Kings have underperformed the total returns of the stock market despite dividend growth.
- Sometimes, management may fail to fix (or just ignore) ongoing issues and keep raising payouts, resulting in big losses and forced dividend cuts, as seen with 3M (MMM +0.65%) and Walgreens in recent years.
Factors to consider when choosing Dividend Kings
One of the most important factors to consider when choosing a Dividend King to buy is its financial health.
Be sure the dividend is supported by strong free cash flow that exceeds the total dividend payment. Steady, growing earnings per share and a solid balance sheet are also important factors that help ensure management can continue to raise its dividend.
Beyond the current earnings profile, does the business have competitive advantages that will protect it in economic downturns? Is the industry it operates in growing or declining?
On top of that, investors will want to assess a Dividend King just as they would any other stock. Most Dividend Kings are slow growers; like value stocks, it makes sense to ensure the stock trades for an attractive valuation.
How to invest in Dividend Kings
