Dividend Kings are a group of around 40 stocks that have increased their dividends for 50 or more consecutive years. An undeniably impressive feat, this list of businesses is a Who's Who in stability and predictable passive income.
However, many Dividend Kings already give back most of their earnings in dividends. These large payout ratios leave minimal dividend growth -- which isn't necessarily bad -- but may not lead to market-beating returns.
A handful of stocks offer the best of both worlds, though: decades of dividend increases with a long dividend growth runway remaining. Two businesses that provide this opportunity now are Lowe's Companies (LOW -0.03%) and S&P Global (SPGI 0.31%).
Here's what makes them such promising options for long-term-focused dividend growth investors.
1. Lowe's
Recording 60 consecutive years of dividend increases, home-improvement juggernaut Lowe's has one of the most impressive dividend growth track records out there. For example, if an investor bought shares 30 years ago and held them until today, they would receive annual dividends yielding 243% compared to their original cost basis.
Said another way, had you bought $100 of Lowe's in 1993, you would now receive $243 each year in dividend payments. Even if investors had bought Lowe's 10 years ago and held their shares, they would already yield 11% versus the company's price in 2013.
This historical dividend growth helps highlight that despite Lowe's current dividend yield of 2%, its passive income potential makes the company interesting when holding shares for the long haul. Moreover, this potential looks particularly promising, considering the company's low payout ratio of only 34%. A stock's payout ratio equals its dividend payments divided by its earnings, which shows that Lowe's should have ample room to continue increasing its dividends far down the road.
Now all this dividend growth and passive income potential sounds fun, but how well is the business itself doing?
Generating 75% of its revenue from do-it-yourself tasks, Lowe's is somewhat insulated from the ongoing slowdown in the housing market. In fact, with non-discretionary purchases accounting for two-thirds of the company's sales, Lowe's products are vital, considering the median age of a U.S. house is 39 years old.
While sales growth stagnated in 2022 after experiencing significant tailwinds during the pandemic, Lowe's Total Home Strategy aims to innovate its outdated operating model. Focused on growing its professional sales (25% of revenue), online sales, and installation services, the company looks poised to diversify its offerings and thrive when the macroeconomic environment improves.
However, Lowe's may still be a haven for investors even if the housing market worsens, thanks to its incredible free cash flow generation and steady share repurchases. Consider that despite sales growth of just 2% in the third quarter of 2022 compared to last year, adjusted earnings per share (EPS) rose 20% thanks to management buying back 10% of Lowe's outstanding shares.
Best yet, these share buybacks are no rare occurrence.
LOW Shares Outstanding data by YCharts.
Led by this steadily declining share count, Lowe's EPS has grown by 508% over the last decade, compared to a 241% increase in net income over the same time. Thanks to the power of these buybacks, its history of dividend raises, and its low payout ratio, Lowe's is a perfect buy-and-hold-forever pick in 2023 for passive income potential.
2. S&P Global
Consisting of much more than the S&P 500 index for which it is known, S&P Global operates through six distinct yet complementary business segments. Highlighting this diversification, the S&P Dow Jones indexes segment -- which is home to its famous index -- only accounts for 12% of the company's total revenue.
Meanwhile, the company's two largest segments -- market intelligence and ratings -- account for more than half of total sales. Whether providing insights for supply chains, sustainability, and private markets or assessing debt and credit risk, the company is a powerhouse in financial data and research.
However, during the third quarter of 2022, S&P Global posted revenue and EPS declines of 8% and 4%, respectively. Hindered by the debt issuance market facing higher interest rates, the company's ratings segment recorded a dramatic 33% decline in sales. Overall, the company's non-ratings operations grew sales by 4% in the third quarter, demonstrating the power of its diverse offerings and that 72% of its revenue comes from recurring sources.
Perhaps more importantly for investors focused on passive income, S&P Global raised its dividend again to start the year, officially making it a Dividend King with 50 years of increases. Furthermore, despite the ratings unit's slowdown weighing on profitability, S&P Global's payout ratio is a meager 27%, leaving plenty of room for future dividend growth.
SPGI Profit Margin data by YCharts.
Maintaining an incredible 34% net profit margin, S&P Global offers immense passive income potential -- especially as debt issuance markets normalize over time. Moreover, while its dividend yield may only be 0.9%, management expects to return 85% of its net income to shareholders annually through dividends and share repurchases.
At 31 times earnings, S&P Global trades above market averages but looks like a classic case of a premium business trading at a fair price. With its market intelligence, ratings, commodity insights, and indexes of paramount importance to the investment community, S&P Global's dividend growth rates and track record make it an excellent Dividend King to buy.
