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5 Top Dividend Kings to Buy and Hold Forever

By Leo Sun - Aug 3, 2020 at 11:19AM

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These are great defensive stocks for a volatile market.

Most income investors are likely familiar with the Dividend Aristocrats -- elite members of the S&P 500 index that have raised their payouts annually for at least 25 straight years. But there's an even more rarefied rank (though one not restricted to S&P 500 members). Companies that extend their payout-increasing streaks for at least 50 consecutive years get to call themselves Dividend Kings.

Right now, there are just 30 Dividend Kings, but I'm going to focus here on five that I think investors can comfortably buy and hold forever: Coca-Cola, Procter & Gamble, Colgate-Palmolive, Johnson & Johnson, and Hormel Foods.

A happy man flashes a stack of bills while wearing a crown and sunglasses.

Image source: Getty Images.

The key metrics

When weighing the income case for buying a dividend stock, investors should focus on three metrics: the forward dividend yield, the cash dividend payout ratio (the percentage of its free cash flow spent on dividends), and the consecutive years of dividend growth.

If a stock's yield is lower than the S&P 500's average of 1.8% or its payout ratio exceeds 100%, income investors should seek out more promising options. None of these five Dividend Kings raise those concerns, however.

Company

Forward
Dividend Yield

Cash Dividend
Payout Ratio*

Consecutive Years
of Dividend Growth

Coca-Cola (KO -0.68%)

3.4%

99%

58

Procter & Gamble (PG -0.71%)

2.5%

57%

64

Colgate-Palmolive (CL -1.05%)

2.3%

55%

57

Johnson & Johnson (JNJ -2.07%)

2.8%

58%

58

Hormel Foods (HRL -0.48%)

1.8%

61%

54

*Dividend payout ratio is for the past 12 months. Data Sources: Company websites, Yahoo Finance, July 30.

Generating healthy cash flows

Coca-Cola's payout ratio spiked over the past year due to the refranchising of its bottlers and its acquisition of Costa Coffee, but those levels should normalize over the long term. Besides that temporary spike, all five companies have generated firmly positive free cash flows -- which fed sustainable cash dividend payout ratios below 100% -- over the past decade.

KO Free Cash Flow Chart

Source: YCharts

First, all five companies own well-established brands with loyal consumer followings. Coca-Cola's brand is synonymous with soda, but in response to the general decline in carbonated beverage consumption, it has diversified its portfolio with more non-carbonated drinks like teas, fruit juices, sports drinks, and bottled water. P&G rules supermarket aisles with brands like Bounty, Charmin, and Pampers, while Colgate-Palmolive locks in shoppers with its personal care and cleaning products.

Johnson & Johnson generates stable cash flows from its diverse pharmaceutical, medical device, and consumer healthcare businesses, while Hormel recently reported strong sales of its packaged meats and Spam's fifth straight year of record sales. Simply put, all five companies own well-diversified businesses that can easily weather economic downturns.

Own these stocks if you expect a deep recession

In fact, all of these companies are viewed as solid defensive plays -- the types of companies that usually outperform the market when investors flee to "safer" stocks during a recession. Here's how they fared compared to the S&P 500 during the last financial crisis:

KO Chart

Source: YCharts

The U.S. officially entered another recession in June after the COVID-19 pandemic shut down many businesses and institutions, and unemployment rates skyrocketed. If you expect things to get worse due to the currently surging waves of new coronavirus infections hit most of the country, high unemployment, escalating trade tensions, and civil unrest, it makes sense to add these Dividend Kings to your portfolio to give it more stability ahead of the oncoming storm.

Don't underestimate the power of reinvested dividends

At first glance, Coca-Cola, P&G, Colgate-Palmolive, Johnson & Johnson, and Hormel may all look like slow-growth investments. Yet investors who simply bought the stocks 10 years ago and left them alone are now sitting on some big gains. However, investors who bought them in 2010 and reinvested their dividends fared even better:

KO Chart

Source: YCharts

The key takeaways

The pandemic has created new challenges and opportunities for each of these companies -- some shared, and some not.

Investors should, therefore, do their homework before crowning their favorite Dividend King. P&G, Colgate-Palmolive, and Hormel are all benefiting from pandemic-driven shopping trends, while retail and restaurant closures are throttling Coca-Cola's shipments. Meanwhile, hospitals' moves to delay surgeries in order to preserve resources for the fight against COVID-19 mean reduced sales of medical devices for Johnson & Johnson. But over the long term, all five of these companies should continue to reward patient shareholders with steady growth and generous dividends.

Leo Sun owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$167.14 (-2.07%) $-3.53
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$63.22 (-0.68%) $0.43
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$145.26 (-0.71%) $-1.04
Colgate-Palmolive Company Stock Quote
Colgate-Palmolive Company
CL
$79.50 (-1.05%) $0.84
Hormel Foods Corporation Stock Quote
Hormel Foods Corporation
HRL
$49.61 (-0.48%) $0.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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