There are thousands of stocks that you could potentially buy, so you need ways to slim down your options. One quick way is by focusing your research efforts on Dividend Kings, which are companies that have increased their dividends annually for 50-plus consecutive years.
Here's why that makes a lot of sense for investors of all stripes.
A simple plan for investing
Benjamin Graham, the man who helped train Warren Buffett in the art of financial analysis, wrote a seminal investing book called The Intelligent Investor. While there's a lot of good general advice in it, he also offered up a short list of screening criteria for investors to use when looking for stocks to buy. One notable inclusion on that list was a strong dividend history.
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The logic behind looking at dividends is pretty simple: Only a successful company can regularly increase its dividend over the long term.
When it comes to reliable dividend growth, the best of the best are on the Dividend Kings list. You don't manage to raise your dividend every single year for 50 years or more by accident. The list includes names you'll probably know, like Procter & Gamble (PG -0.78%), and ones you may not be as familiar with, like Black Hills (BKH -0.63%). It has stocks with historically high yields, like Stanley Black & Decker (SWK 0.99%), and stocks with historically low yields, like Nucor (NUE -0.26%). Although dividends are what get a stock on the list, it isn't inherently a collection of income stocks.
Here are three reasons why you might want to start consulting the Dividend Kings list as you look for investment opportunities.
1. It's a quick and easy way to simplify your investment research
There are around 40 companies that have increased their dividends annually for 50-plus years. The number varies from year to year, of course, as new companies achieve Dividend King status and some old ones fall off the list because they fail to increase their dividend (or worse, cut it). However, with one very simple screen (the number of years of annual dividend increases), you have significantly reduced the number of stocks you are considering by highlighting companies with a lengthy track record of success.
To be fair, you don't have to stick to 50 years as your cutoff. You could choose a lower (but still substantial) number. For example, 40 years, or 25, or even 10. The lower the benchmark, the larger the number of stocks you'll have to look through. But even at 10 years, you will still be taking your research universe from thousands to just a few hundred. Start adding in additional screens, like dividend growth rates, and you can easily end up with just a handful of high-quality stocks to research.
PG Dividend Yield data by YCharts
As an example, consumer staples giant Procter & Gamble has increased its dividend annually for over six decades, and the dividend has grown by roughly 5% a year over the past decade. A company must intentionally create a record like that. While the yield of around 2.4% isn't huge, it's about middle of the road, historically speaking. While clearly not a value opportunity, growth and income investors might find that quick backstory attractive enough to break open a 10-K or two to do further research.
2. These companies know how to survive the economic cycle
While looking at stocks with a 10-year streak of dividend increases is cutting things a bit close, the longer the streak, the more you can be sure that a company has survived economic hardship. Nucor is a good, though perhaps extreme, example. This steelmaker operates in a highly cyclical industry and yet has managed to increase its dividend annually for five decades. Although the yield is historically low today thanks to a huge stock price advance over the past couple of years, it might still be worth digging in to understand how management achieved that feat.
The quick answer is that Nucor has an advantaged business model (it's adept at allocating resources to keep delivering value), strong employee relations, a growth mindset, and conservative business principles. Maybe you don't want to buy Nucor today because the stock looks expensive, but if there's an economic downturn, the price of this cyclical business could quickly become very compelling. And the dividend history suggests that management will deftly steer the company through the headwinds so it can continue to reward investors over the long term.
3. These companies put shareholders at the top of the list
All companies go through difficult times, so dividend cuts are, broadly speaking, inevitable. But a long dividend streak can be a good sign that a company values its shareholders. For example, Dividend King Stanley Black & Decker is deeply out of favor today. There are good reasons for that: Its earnings have collapsed as it tries to deal with a heavy debt load, high inflation, and the need to step back and finally integrate the businesses acquired via a string of acquisitions. The stock has fallen around 50% from its 2022 peak, pushing the yield notably higher.
This isn't the first time the tool company has experienced a dramatic drawdown, however. What's interesting is that, despite today's headwinds, it continued to increase its dividend. To be fair, the last two annual dividend boosts have been just $0.01 a share. That's a mere token, but in that token, there is a statement.
Clearly, Stanley Black & Decker understands that the dividend is a vital way to return value to shareholders over the long term. And, perhaps as important, the board's willingness to provide that very modest dividend increase says that the company believes it will survive the hardships it is going through. Notably, Stanley Black & Decker's gross margin has improved for two quarters in a row, so there are some early signs of turnaround success here.
Not a silver bullet, but a good starting point
That said, VF Corp. (VFC 0.16%) recently cut its dividend after decades of annual dividend increases. That cut was largely driven by a major change in strategy, as the clothing company chose to focus more on fashion brands following the spinoff of its basics apparel segment into Kontoor Brands (KTB 0.65%). When hard times hit, it didn't have the reliable basics business to fall back on. In other words, you can't simply buy Dividend Kings without doing research into the company you are buying.
And yet, given the vast number of stocks you could buy, using the Dividend Kings list to cut through the noise is still a great approach. If you run out of stocks to examine, you can always lower the streak requirement. The real idea, as Benjamin Graham highlighted, is to make use of the important signals that dividends impart so you can spend your precious time more wisely.
