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, e.g., 3M (MMM +0.78%) and Walgreens.
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 keep raising 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
- Open your brokerage app: Log in to your brokerage accountwhere you handle your investments.
- Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Why invest in Dividend Kings?
Dividend Kings may not be a good fit for every investor, but their long records of growing payouts are often underpinned by good businesses worth owning. A few key reasons:
- Dividend Kings can be a great part of retirement portfolios or for investors looking for reliable income.
- Most offer higher dividend yields than the average yield of S&P 500 members.
- Their consistency in paying and increasing dividend payouts can also provide a measure of confidence for people living on the income generated by the dividend stocks they own.
