How To Invest For Rising Passive Income With Dividend Kings

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Last Updated on April 10, 2021 by Chris Panteli

Passive Income With Dividend Kings

Many investors dream of a time when they can retire and live off of their investment income. This scenario may seem difficult to achieve, and it does require a significant amount of financial planning and discipline over the years. However, with the right selection of stocks, and the ability to filter out short-term noise in the stock market, it can be achieved.

There are many income investment choices for investors today, from exchange-traded products to bonds or treasury-linked instruments, and of course, traditional dividend stocks. But even within the realm of dividend stocks, investors are spoiled for choice. Depending upon one’s goals, and what point in life the investor is in, choosing stocks with higher current income or higher dividend growth may be appealing.

In this article, we’ll take a look at what we believe is the best way to create rising income over time, and that is with high-quality dividend growth stocks such as the Dividend Kings.

What Is A Dividend King?

The definition of a Dividend King is quite simple–the company has to raise dividends for common shareholders for at least 50 consecutive years. That is the only criteria to make the Dividend King list, unlike other dividends increase streak lists such as Dividend Aristocrats, which also requires the company be part of the S&P 500 and meet certain size and liquidity requirements. Dividend Kings have no such alternative requirements, so smaller names can make the list if their dividend increase streaks pass the test.

Given the enormity of the task of increasing dividends for more than half a century consecutively, it is unsurprising there aren’t very many stocks that make the list. Indeed, there are only 31 Dividend Kings, and they are mostly concentrated in sectors like Industrials, Consumer Staples, and Utilities.

The sector allocation also makes perfect sense given a company that has the earnings stability to raise its dividend for at least 50 consecutive years must be recession resilient, and have durable competitive advantages. Without these characteristics, it is easy for a company to have to pause dividend raises, or even cut or suspend the payout altogether during tough times. The Dividend Kings are exceptional in that they’ve stood the test of literally decades of economic conditions, and raised the payout every single year irrespective of those conditions.

Thus, if an investor is searching for the best of the best in terms of rising income, the Dividend Kings list is a logical place to start.

How To Use Dividend Kings To Create Rising Passive Income

Now that we’ve established that Dividend Kings have the longest track records of producing rising income, let’s take a look at how choosing from this upper echelon of dividend stocks can help investors create the amount of rising passive income they need over time.

Traditional dividend stocks that don’t have the staying power of Dividend Kings generally suffer from being susceptible to recessions or have weaker competitive advantages that cause profits to be unreliable from year to year. In practice for the dividend investor, this can mean uneven growth in the payout, or a lack of dividend growth entirely. For investors relying upon this income in retirement, or another stage of life, this can be very challenging.

Dividend Kings, on the other hand, have proven their ability to raise their payouts under any condition, and this is why they are superior for creating rising passive income over time. After all, if the goal of the investor is to see higher income year after year, what better place to look than the best dividend growth track records in the market.

Dividend Kings don’t tend to offer the highest yields because investors pay premiums for these stocks specifically because of their exemplary dividend histories. In other words, the ability to rely upon a higher dividend coming every year is very attractive, and investors must pay for that right. Still, even if yields tend to be a bit lower than some other categories of dividend stocks, for meeting the goal of rising income, Dividend Kings are simply unparalleled.

High-Quality Dividend Kings: 2 Examples

Not all Dividend Kings are created equal, although they do all offer similar dividend growth streaks. But some Dividend Kings are overvalued in our view, while others offer a sweet spot of value and yield that makes them particularly attractive.

One example of a high-quality Dividend King that we like is Lowe’s Companies (LOW), the second-largest home improvement company in the US. Lowe’s was founded in 1921 and has been raising its common shareholder dividend per share for 57 years. Home improvement retailers generally aren’t considered particularly recession safe, but Lowe’s has bucked the trend and has managed to produce a world-class dividend increase streak.

Lowe’s has been able to achieve this mostly through sizable earnings increases, which afford it the ability to return some of those earnings to shareholders via ever-increasing dividends. Indeed, in the decade ended 2020, Lowe’s managed a compound annual growth rate in earnings-per-share of more than 18%. That sort of earnings growth makes it much easier to continue to raise the payout over time, given there is more cash available to do so.

Lowe’s has raised its payout by an average of more than 16% per share in the past decade as well, so the company isn’t posting token increases simply to keep its dividend increase streak alive. This is a strong dividend growth stock despite its leadership position as part of the Dividend Kings.

Even today, Lowe’s payout ratio is around just one-quarter of earnings, which is where we expect it will stay for the foreseeable future. This not only affords Lowe’s the ability to maintain its dividend growth if an earnings decline should befall it, but it also means that Lowe’s has an enormous runway to continue to raise the dividend over time. For this reason, we see Lowe’s as having potentially decades of further dividend increases coming to investors.

Unfortunately, this exceptional track record means that Lowe’s current yield is quite low at just 1.3%. However, for an investor that is looking to achieve rising income each year, it is difficult to match Lowe’s.

Our next stock is Altria Group (MO), a company we like for different reasons than Lowe’s, but one that very much fits into the mold of dividend royalty. Altria was founded in 1822 and has been raising its payout to investors each year for 51 years. Altria is part of the consumer staples category, which is one that is more often associated with safe dividends than some others. Altria has produced reliable earnings growth year after year, which has afforded it the ability to make this list.

Altria’s earnings-per-share growth in the decade ended 2020 was just over 10%, despite the fact that it faces obvious industry headwinds, not the least of which is constantly declining smoking rates. Altria is combatting this by moving into cigarette alternatives in a big way, and we see modest growth coming in the next few years as it moves through this transition.

Altria has been an attractive dividend growth stock for many years. In the past decade, the compound annual growth rate of the dividend per share has been more than 8%, so again, these are sizable annual raises for shareholders. Altria’s payout ratio is elevated at nearly 80% of earnings, but given tobacco, stocks tend to have extremely low capital expenditure requirements, a huge proportion of earnings is available to return to shareholders. That is what Altria has done, and why it has made the list of high-quality Dividend Kings.

Unlike Lowe’s, Altria is a high dividend stock with a current yield of 6.7%. Altria’s beaten-down valuation is certainly part of the reason why the yield is as large as it is, but Altria’s current yield is usually quite strong. Today, it is more than three times that of the 10-year Treasury yield, and nearly four times that of the S&P 500, so Altria stands out among the Dividend Kings, and in a good way.

Final Thoughts

Investors looking for rising income have a variety of choices in the market today. We see selecting the best, highest quality stocks from the Dividend Kings list as the best path for producing rising passive income over time, given their enormous resiliency to all kinds of economic conditions, their shareholder-friendly management teams that prioritize returning cash to shareholders, their stable earnings growth profiles, and the simple fact that investors can rely upon them to continue to raise the payout no matter what.

We selected two stocks that we like from the Dividend Kings list, albeit for very different reasons. Investors looking for rising passive income can select from stocks like Lowe’s that offer lots of earnings growth – and therefore dividend growth – potential due to a low current payout ratio and robust earnings outlook, or stocks like Altria, which offer extremely high current yields, but a bit less in terms of outright earnings or payout growth potential.

Either way, the list of Dividend Kings offers something for just about any investor interested in rising passive income, and blending some of these characteristics together can help create a passive income portfolio with a favorable mix of current yield and future growth potential.

Disclosure: No positions in any stocks mentioned

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Passive Income With Dividend Kings

Author Bio: Josh Arnold has been covering financial markets for nearly a decade, focusing on covering value and dividend stocks to build long-term wealth. He’s an independent investor that looks for long-term opportunities in undervalued stocks with strong competitive moats.