If you're an income investor, you may have heard tales of mighty companies that have raised their payouts no matter the economic cycle. Only 49 companies over the past 50 years have managed to accomplish this monumental feat. But the ancient lore can be misleading as far fewer companies have a high yield and a market capitalization above $10 billion.
Target (TGT 0.18%), Coca-Cola (KO), Kimberly-Clark (KMB -0.87%), AbbVie (ABBV -4.58%), Altria (MO -0.37%), Stanley Black & Decker (SWK 0.99%), and 3M (MMM 0.46%) are the seven companies that stand alone on the throne of large-cap Dividend Kings with a yield over 3%. Here's why the distinction is important, and which of these seven Dividend Kings is the best buy now.
Image source: Getty Images.
A valuable starting point
Investors gravitate toward Dividend Kings for stability. Raising a dividend every year no matter what is a good initial screener because it implies a company is growing earnings, demonstrating capital discipline, and maintaining a strong balance sheet. Of course, deeper digging is needed to determine whether that's the case.
Not to pick on 3M too hard, but the company has been making minimal one-cent-per-share dividend raises over the past few years. And its balance sheet and earnings growth have deteriorated. So although it has raised its dividend for 65 consecutive years, it's going to have to turn its business around if it wants to raise its dividend for the next 65 years, too.
Many Dividend Kings are mid- or small-cap stocks. That isn't necessarily a bad thing. And there can be hidden value in an overlooked smaller company with a track record for raises. However, investors looking for a reliable passive-income source may prefer a large, industry-leading company.
The lesson here is that Dividend Kings have checked merely one box. And it takes a lot more than a 50-plus-year dividend increase streak to win the vote of confidence needed to buy and hold a company for an extended period.
Thinning the herd
The ideal Dividend King would be a company with a large market cap, high yield, wide moat, powerful brand, earnings growth, and a strong balance sheet -- and it should be a good overall value. That's a tall order. But rightfully so, as we aren't just settling for good. We want the best Dividend King.
AbbVie is up there with Procter & Gamble and Coca-Cola as one of the highest-market-cap Dividend Kings. The drugmaker has a wide moat, strong earnings growth, and a juicy 3.8% dividend yield. But it's not a cheap stock by any means. Still, some may argue it's the best Dividend King out there. And it would be hard to claim it's not at least in the top three.
AbbVie has better growth prospects and a higher yield than Coca-Cola or Kimberly-Clark, and it's only a little more expensive.
TGT PE Ratio data by YCharts
Tobacco titan Altria has a massive 8.8% dividend yield, but it could see negative future growth, given the bleak outlook of its industry. Stanley Black & Decker and 3M are a good value and have high yields. But these stocks are certainly in turnaround play mode as their earnings have been under pressure and both companies are undergoing massive restructurings.
So I'll give AbbVie the silver medal, but the gold has to go to Target.
In a league of its own
Target stock is down 53% from its all-time, and you could argue that the sell-off is warranted based on the short-term outlook. The retailer is vulnerable to rising interest rates, inflation, declines in consumer spending led by a pullback in discretionary goods, and the economic cycle.
The company had demonstrated earnings growth, but its profit margin has been under pressure as it reduced inventory through discount sales. However, Target's margin and earnings have recovered, and there's reason to believe the company is on track to fuel earnings growth for decades to come.
With a 16.4 price-to-earnings ratio, 3.6% dividend yield, powerful brand, a path toward earnings growth, and brutally negative near-term sentiment, Target has the perfect recipe for a Dividend King that's worth buying now.
One of the best ways to compound wealth over time in the stock market is to find quality companies and buy them when few others want to do so. That's what happened with big tech stocks such as Meta Platforms, Alphabet, and Amazon last year. All three are up massively this year. The same happened with oil and gas stocks in 2020. Since then, many top energy stocks are now at all-time highs.
A long-term potential winner for patient investors
I wouldn't expected a V-shaped recovery for Target stock. But given the long-term prospects and how bruised and battered the stock is today, it certainly stands out as a top-shelf buying opportunity for patient investors.
Even if the recovery takes longer than expected, Target's high yield provides a sizable incentive for investors to hold the stock and give Target the time it needs to restore its high margin.
Add it all up, and there's a lot to like about Target stock relative to other Dividend Kings, especially at its discounted price.
