A well-rounded investment portfolio should include dividend-paying companies. As a shareholder, dividends are a way to be rewarded for holding on to your investments, and when utilized the right way, they can make up a good portion of your portfolio's total return. However, not all dividend-paying companies are created equal. If you're looking for consistent, well-established companies, look no further than Dividend Kings.
Here's why you should let them lead you to the promised land.
Image source: Getty Images.
They've stood the test of time
Dividend Kings got their honorable title because they've managed to increase their yearly dividend for at least 50 consecutive years. Being able to maintain a dividend for that long is an accomplishment in itself, but being able to increase it for that many years is a completely different feat. With Dividend Kings, you know you're investing in companies that have stood the test of time.
Any company with the Dividend King title in 2022 has increased its dividend since 1972, at a minimum. During that time, these companies have made it through some of the toughest economic conditions the U.S. has seen. Dividend Kings have made it through:
- Black Monday (1987).
- Dot-com bubble collapse (2000).
- The Great Recession/Financial crisis (2008-2009).
- COVID-19 pandemic (2020).
There are many solid companies who had to cut their dividends during those times, including prominent Fortune 500 companies, but Dividend Kings stood tall and weathered the storm.
There's power in the DRIP
While receiving dividends can be a great source of income, the real power comes when you enroll in your brokerage company's dividend reinvestment program (DRIP). With DRIP, any dividends you receive are automatically used to buy more shares of whatever company or fund paid them out. This adds to the power of compound interest.
Let's imagine we have two funds -- one without a dividend and one with a 2.5% dividend yield -- and you contributed $500 into both monthly, receiving a 10% annual return (the historical average of the S&P 500). Assuming the dividend yield stays the same, here's how the account totals would look in 25 years:
| Fund | Dividend Yield | Amount Contributed in 25 Years | Account Total After 25 Years |
|---|---|---|---|
| Fund 1 | 0% | $150,000 | $590,000 |
| Fund 2 | 2.5% | $150,000 | $864,000 |
Data source: author calculations
With zero additional effort, receiving (and reinvesting) dividends increased your account total by roughly $274,000. As a dividend investor, it helps to delay receiving payouts in cash until retirement, when having an additional source of income can be more beneficial. Until then, you can reap major rewards by using a DRIP. Even if you manage to accumulate $500,000 in a fund with a 2.5% yield, that's $12,500 in yearly payouts.
More importantly, it helps to invest in Dividend Kings because you can, in good faith, not only rely on the dividend but also anticipate it increasing. Your dividend payout increases, your number of shares increases, and you receive higher payouts; it's a cycle you want to get stuck in.
