Many investors are familiar with the Dividend Aristocrats, an elite list of companies that have raised annual dividend payouts for at least 25 consecutive years. Dividend Kings take this a step further: They're on at least a 50-year streak.
If you're looking to invest in Dividend King stocks, here's a word of caution. It's tempting to simply peruse the short list to find the stocks with the highest dividend yields. But even if you prioritize income, you are buying shares of a business, not merely purchasing the rights to a quarterly distribution.
Therefore, stop and consider whether these companies are worth owning even without a dividend. How you answer that question can be an indicator for the company's prospects. With that in mind, here are five Dividend King stocks to consider adding to your portfolio.
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1. A crucial link in the food chain
As a key supplier for the restaurant industry, Sysco (SYY 0.53%) was hammered earlier this year after dining rooms shut down around the world. The company quickly cut costs and pivoted toward supplying the surging demand at grocery stores. It didn't entirely recoup lost revenue -- sales were down 6.5% in the third quarter of fiscal 2020 -- but the moves did give management the confidence to continue paying out its quarterly dividend, currently yielding 3.4%.
With over 320 distribution centers worldwide, Sysco has hard-to-replicate scale to supply food. And eating is an activity you can confidently wager will always be important. The upcoming fiscal fourth-quarter results will be worse than the last report, since the third quarter included fewer days impacted by the coronavirus shutdown. But the COVID-19 pandemic is the most extreme event to affect Sysco in its long dividend history. Despite this, it appears the company's payout streak won't be disrupted, which is partly why it's a top Dividend King.
Image source: Hormel Foods.
2. Committed to earnings growth
Spam might be the most well-known product from Hormel Foods (HRL -0.06%), but the company owns food brands in over 40 categories. Its dividend payout doesn't qualify as high with the stock currently yielding 2%. Its business isn't high growth either -- full-year net sales have been flat from 2016 through 2019. And its stock isn't priced in bargain-bin territory, trading at 28 times trailing earnings.
So why buy Hormel stock? Over the past decade, the company has grown earnings per share at an 11.1% compound annual rate. It's done this by getting rid of product lines with low margins and acquiring higher-margin brands. Long term, it's targeting 10% annual bottom-line growth, growing the pot from which it pays out dividends. And its payout ratio is only 52% right now, meaning it still has plenty of room for dividend raises.
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3. Room to grow the dividend
Stanley Black & Decker (SWK -0.71%) has a portfolio of well-known tool brands such as Craftsman and its namesake products. It's a low-growth business with organic revenue up just 3% in 2019. And the COVID-19 pandemic has decimated sales. It expects upcoming second-quarter revenue to decline 35% to 45% year over year. That hurts.
Here's why you might want to look past this setback. Stanley Black & Decker is committed to returning 50% of free cash flow to investors through dividends and share repurchases. The other 50% it will use on acquisitions that will both grow and diversify its business. It just acquired a 20% stake in MTD Products with a future option to purchase it outright, giving the company exposure to outdoor power tools. More recently, it acquired Consolidated Aerospace Manufacturing, giving it an entry into the aerospace sector.
The more Stanley Black & Decker diversifies, the less it might be affected by economic cycles in any one industry. Furthermore, it's acquiring profitable businesses that add to cash flow over time, directly benefiting shareholders. Considering the company's payout ratio is quite low for a Dividend King at 45%, it has plenty of room to continue increasing its dividend now while it waits for the acquisitions to pay off later.
Image source: Getty Images.
4. Can't be dethroned even with $100 billion
Coca-Cola (KO -0.24%) is the global leader in carbonated soft drinks. And its hard-earned position won't be easily lost, as summed up by this quote from investing legend Warren Buffett: "If you gave me $100 billion and said to take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done." The downside of already achieving global dominance, however, is that organic sales growth is hard to come by.
But organic revenue growth isn't impossible, as evidenced by Coca-Cola's 6% growth for full-year 2019. Its products are immensely popular, and with its 2019 acquisition of Costa Limited, it now has a product line for one of the only nonalcoholic beverage categories it previously lacked: coffee. Granted, sales volume was down as much as 25% because of COVID-19, but I expect sales to return to normal as we move past the coronavirus.
Coca-Cola stock is still down around 25% from its 52-week high, giving it one of the best dividend yields it's ever had at 3.6%.
Image source: Getty Images.
5. A business worth owning
I've saved the best Dividend King for last. It's the best, because home-improvement retailer Lowe's (LOW -0.88%) is a strong business you'd want to own even if it didn't pay a dividend. Everyone needs a place to live, and Lowe's 2,200 locations provide products for our living spaces, from regular maintenance to major upgrades. In short, its business doesn't go out of style.
The coronavirus shutdown in the U.S. actually boosted Lowe's business. Comparable-store sales in the fiscal first quarter increased 12.3%, and management noted the spike was ongoing. Cost of sales also decreased during the period, growing profitability. Earnings per share increased 35% year over year to $1.76.
Even if sales revert to normal levels in the coming months, which is likely, Lowe's made it through a terrible period for retailers without any harm. It won't have to focus on repairing its business. Rather, it can return focus to the growth avenues it was pursuing before the outbreak, making me optimistic this company will continue generating positive shareholder returns.
