When we think of stock market investing, we often think of choosing stocks we hope will soar, and that's definitely a huge part of this exciting and generally rewarding activity. But it isn't the only way to win in the stock market. You may also significantly grow your wealth by collecting passive income. The great thing about this is that you can pocket these payments regardless of the overall market's performance -- or even the dividend-paying stock's performance.
As you can imagine, holding dividend stocks during tough market times is particularly wise because it may significantly cushion your portfolio's performance. And during positive market environments, you'll be happy to collect this extra income. I think we all like automatic payments that require absolutely no effort.
All this sounds great, but now you may wonder about the best way to capture this passive income. The key to that may be found in stocks known as Dividend Kings. In fact, history has something compelling to say about long-term investing in these players. Let's take a closer look.
Image source: Getty Images.
What are Dividend Kings?
So, first, what are Dividend Kings? They're a group of stocks across industries that have raised their dividend payments for at least the past 50 consecutive years. Some of them have well surpassed that. For example, American States Water (AWR 0.37%) and Procter & Gamble (PG 0.59%) have lifted their payments for 70 years and 68 years, respectively. And you'll likely recognize many names in the Dividend Kings list, from healthcare giant Johnson & Johnson (JNJ 0.37%) to beverage powerhouse Coca-Cola (KO 1.03%).
Investors often buy Dividend Kings because these companies have a long track record of not only paying dividends but also increasing them. This shows that rewarding shareholders is one of their priorities, so it would be surprising if they changed course and halted dividend increases or stopped paying dividends. Also, lifting a dividend for so many years is an achievement most of these companies highlight in their communications with investors, so they probably want to keep this accomplishment going.
Importantly, companies that have been able to boost their dividends for so many years are in a financial situation to do so. This supports the idea of continued dividend growth and should offer us confidence about the company's general earnings strength and future prospects. All these points together add to the evidence that these companies will likely keep increasing their dividends and have what it takes to deliver earnings growth over the long run.
The results of investing in Dividend Kings
But how does that equal investment returns? Let's look to history for examples of how this has turned out for long-term investors. We'll consider the four stocks I mentioned above and look at how much you would have today if you'd invested $10,000 in each 10 years ago. The following chart includes stock performance and dividends.
JNJ Total Return Price data by YCharts.
And the next chart shows only stock performance, illustrating that even though you would have gained, you clearly gained even more thanks to the dividend payments.
So, dividend payments can make a big difference in your winnings over time -- and in certain cases, these payments can even protect you from declines. For example, if you'd invested $10,000 in Target (TGT -0.79%) a decade ago and don't include dividends, today you would have a little more than $11,000, considering the stock's lackluster performance in recent years. But if you include this Dividend King's dividends, your investment would be worth $16,000.
This shows us that Dividend Kings are worth owning and that even tough times, such as those experienced by Target in recent years, are often smoothed out for long-term investors thanks to these payments.
Of course, you can also find fantastic dividend players beyond the Dividend Kings list. Many stocks have a shorter track record of payments but are on their way to becoming dividend stocks you can count on. So, it's worth considering some of them, too. For example, pharma giant Pfizer, with its 7.4% dividend yield -- far surpassing the 1.2% dividend yield of the S&P 500 -- has recently said that a key part of its strategy is growing its dividend.
If you're looking for a very secure source of passive income, history offers us a compelling message: You'll want to be sure that your dividend stocks portfolio includes at least a couple of Dividend Kings.
