There are some situations when the best evidence of success is found in a company's history. More often than not, dividends fit that mold.
Decided on by the board of directors, a long history of dividend increases is a very good indication that a company places a high value on returning value to investors via, well, dividends.
Procter & Gamble (PG +0.10%), Coca-Cola (KO +0.28%), and Colgate-Palmolive (CL +1.01%) have among the most impressive dividend histories you'll find in corporate America. Here are five factors investors should consider.
1. The streaks
As noted, the board of directors sets company dividend policy. That's important -- financial performance dictates how well a company covers its dividend in any given period, but the commitment to the dividend is what keeps it growing through both good times and bad ones. And every company goes through hard times eventually.
NYSE: CL
Key Data Points
Procter & Gamble has increased its dividend for 67 consecutive years. Coca-Cola's streak is up to 61 years. And Colgate-Palmolive is at six decades. All are highly elite Dividend Kings. This doesn't guarantee that a dividend won't get cut, but it clearly shows how important growing the dividend is to these companies. Don't underestimate the value of that.
2. Boring businesses
Another thing that all three of these companies have in common is that they are consumer staples stocks. P&G and Colgate have material overlap in their products, with offerings ranging from toothpaste (both) to paper towels (only P&G) to skin care (both). Coca-Cola makes drinks. But all three basically sell products that are modestly priced and bought frequently. In general, large consumer staple companies are fairly stable businesses (more on this in a second).
3. Scale
The consumer staples sector is filled with a small number of very large companies, and a large number of small companies trying to break into the industry with novel products.
The largest companies benefit from economies of scale in production and distribution, brand clout in advertising, brand importance when negotiations with retailers, and an enhanced capacity for product development that keeps customers coming back for more.
Smaller players are working against a difficult backdrop and often get bought by the larger players if they have interesting products. P&G, Colgate, and Coca-Cola are all industry heavyweights with scale that few can match.
NYSE: PG
Key Data Points
4. Covering the bills
Dividend payout ratios go up and down over time, with Colgate actually over 100% right now. However, historically, all three have had reasonable payout ratios somewhere between 50% and 80% over time. A one-year blip isn't a reason to be too worried here. While some might consider these payout ratios high, over time the businesses have clearly proven more than capable of supporting this much cash being passed on to shareholders.
Meanwhile, all three robustly cover their interest expenses, with Colgate covering trailing 12-month interest costs by 15 times, Coca-Cola 25 times, and P&G a huge 44 times. Because they sell a lot of products frequently, consumer staples stocks can sometimes have a fair amount of leverage -- but, as the numbers here show, the ability to handle that leverage is strong for this trio.
NYSE: KO
Key Data Points
5. The trade-off
So P&G, Coca-Cola, and Colgate are reliable, industry-leading companies with strong dividend histories, and they are in solid financial shape. They are highly likely to keep paying you dividends for a very long time. What's not to like? Well, Wall Street is aware of all of the positive facts, so the stocks are rarely cheap. While all have above-market dividend yields, none offer what you would call a huge yield. Essentially, you are paying full price for high-quality companies that look like they can support the dividends they pay over the very long term.
Some investors will prefer stocks that are cheaper, which is perfectly reasonable. But if what you really want is a stock that can keep paying you through thick and thin, paying full price may be well worth the cost of sleeping well at night.
Time for a deep dive
If you are trying to live off of the dividends your portfolio throws off, having a few rock-solid names in it, like P&G, Coca-Cola, and Colgate, is probably a good idea. They will provide a reliable foundation on which you can layer in higher-yielding, and perhaps riskier, fare.
If you would rather wait until the stocks look cheaper, that's fine. But putting these Dividend Kings on your wish list would be the right move, because Mr. Market rarely puts these industry giants on sale.
