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Dividend Kings
The Dividend Kings are an elite group of companies that have all paid and increased dividends for at least 50 consecutive years. There are multiple lists of dividend kings on the internet, some that include more than 44 companies. I have chosen to use the list provided by Suredividend.com that was updated on May 2, 2022 and includes 4 new stocks this month.
The new additions are: Computer Services, Inc. (OTCQX:CSVI), Illinois Tool Works (ITW), MSA Safety Incorporated (MSA) and Tennant Company (TNC). It’s wonderful to see one of the most elite dividend lists growing this year.
The 44 companies on the dividend king list span 9 unique sectors, offer an average dividend yield of 2.40% and have an average 5-year dividend growth history of 6.70%. Even though all 44 of these companies share the status of an elite dividend stock, not all will offer great returns going forward. So how can an investor identify the dividend kings that have a higher chance of offering better returns?
In my prior article, I shared a method for selecting the dividend kings that present the best opportunity for better than average future returns. The method leverages a long-term pattern of correlation between share price appreciation and long-term earnings growth. The pattern is more evident when applied to a group of stocks and measured over a longer time period. While this method may not work for all stocks, it can help identify a group of stocks that collectively can outperform a universe of stocks.
First, let me explain in more detail how and why this strategy may work and then I’ll share the real results.
EPS Growth Combined With Valuation
Forecasted EPS growth rates are a useful indicator of future returns, but this factor can be strengthened when combined with the current valuation of a given stock. My preferred method of valuation for dividend stocks is the dividend yield theory. The premise is simple, if the current dividend yield exceeds the trailing dividend yield, a stock is considered to be potentially undervalued and vice versa.
I have decided to test this theory on the dividend king universe of stocks going forward. Each month, I will select roughly the top quarter of dividend kings, 8 companies, that present the best-forecasted EPS growth rate combined with current valuation. I will be using analyst forecasted 5-year EPS growth rates from FinViz.com. Current valuation will be computed using current and trailing dividend yields obtained from Seeking Alpha. I will assume that a given stock can return to fair valuation within a 5-year period that aligns with the forecasted EPS growth rate. Potentially undervalued stocks will be awarded a boost to their forecasted EPS growth rate equivalent to the annualized rate of return necessary to bring the share price back to fair value within the 5-year period. Overvalued stocks will be penalized using the same principle in reverse.
I may need to expand the number of selected dividend kings each month in the future. Originally, selecting 8 dividend kings accounted for roughly 25% of the dividend king universe of stocks. Currently 8 dividend kings are roughly 18% of the universe. If the dividend king list will continue to expand I may increase the number of selections from 8 to 10 each month.
Past Performance
The table below shows the returns for the chosen dividend kings using this methodology for the time period of July 2021 through April 2022.
|
Ticker |
Jul 21 |
Aug 21 |
Sep 21 |
Oct 21 |
Nov 21 |
Dec 21 |
Jan 22 |
Feb 22 |
Mar 22 |
Apr 22 |
|
ABM |
4.83% |
6.52% |
-9.11% |
-1.82% |
2.25% |
-9.22% |
2.52% |
7.53% |
2.70% |
-0.78% |
|
ABT |
-5.37% |
-1.87% |
||||||||
|
BDX |
6.42% |
1.06% |
||||||||
|
CWT |
12.86% |
1.75% |
||||||||
|
FUL |
1.86% |
4.57% |
-4.45% |
9.50% |
3.76% |
10.72% |
-11.40% |
-3.36% |
1.22% |
|
|
HRL |
-1.81% |
-9.97% |
3.81% |
-2.17% |
17.90% |
|||||
|
LOW |
-0.25% |
5.81% |
-0.51% |
15.68% |
4.61% |
5.68% |
-7.87% |
-6.86% |
-1.82% |
|
|
MMM |
-9.57% |
0.15% |
-3.13% |
|||||||
|
MO |
-3.33% |
|||||||||
|
NDSN |
-0.19% |
6.74% |
0.63% |
-8.90% |
-2.39% |
0.26% |
-5.02% |
|||
|
NWN |
-0.91% |
-4.37% |
13.13% |
|||||||
|
PH |
1.60% |
-4.60% |
||||||||
|
PPG |
-9.42% |
-14.23% |
-1.78% |
-2.35% |
||||||
|
SJW |
8.89% |
|||||||||
|
SWK |
-1.92% |
-8.92% |
2.52% |
-2.33% |
-7.41% |
-6.84% |
-13.64% |
-14.05% |
||
|
SYY |
-3.98% |
7.35% |
-0.85% |
-2.04% |
-8.92% |
12.15% |
0.08% |
11.45% |
-5.72% |
4.69% |
|
TR |
1.42% |
-3.85% |
||||||||
|
Return |
3.40% |
2.21% |
-4.73% |
4.19% |
-1.31% |
7.18% |
-5.17% |
-3.28% |
-2.91% |
-2.66% |
|
Benchmark |
1.71% |
0.83% |
-5.33% |
4.05% |
-1.68% |
8.79% |
-3.88% |
-2.25% |
1.24% |
-2.27% |
|
Alpha |
1.70% |
1.37% |
0.60% |
0.13% |
0.36% |
-1.61% |
-1.29% |
-1.04% |
-4.15% |
-0.39% |
4 out of the 8 chosen dividend kings for April finished last month with a return better than the average dividend king universe return. But even with half the selections providing good results the strategy underperformed the average dividend king universe return by 0.39%. The main cause of underperformance was Stanley Black & Decker (SWK) that lost 14.05% in April. April is the 5th consecutive months of underperformance for this strategy after 5 consecutive months of outperformance. But since this is a long term strategy a short period of weaker results is perfectly normal. The strategy actively seeks out-of-favor companies that may offer weak initial returns. A better measure for this strategy is with a buy-and-hold approach that is discussed later in this article.
8 Best Dividend Kings For April
Since this method relies on two factors that are constantly changing, it is likely that we will experience a high turnover rate with this strategy. I have updated the analysts’ expected future earnings growth rates for all the dividend kings and applied the necessary valuation adjustments. Here are the 8 dividend kings with the best expected future growth rates for May.
Created by Author
There are 4 changes to the top 8 list this month. ABM Industries (ABM), Lowe’s (LOW), 3M Company (MMM) and Nordson (NDSN) are replaced by California Water Service (CWT), MSA Safety, Parker-Hannifin (PH) and Tennant Company. Part of the high turnover this month is a direct result of the 4 new dividend kings we have to choose from. As the overall market continues to decline the forward looking return assumptions for the top 8 dividend kings continue to climb. The expected rate of growth for this month’s 8 dividend kings is 24.25% as compared to 20.96% last month.
Please note that this stock selection strategy focuses solely on quantitative data. Further due diligence is necessary to ensure there are no major negative catalysts for each dividend king.
In addition to tracking the returns for the 8 best dividend kings each month, I also track how a buy-and-hold portfolio has performed for this stock selection method.
|
EPS + Value |
Benchmark |
Alpha |
|
|
Jul 21 |
3.40% |
1.71% |
1.70% |
|
Aug 21 |
1.99% |
0.83% |
1.16% |
|
Sep 21 |
-5.05% |
-5.33% |
0.28% |
|
Oct 21 |
4.54% |
4.05% |
0.48% |
|
Nov 21 |
-0.07% |
-1.68% |
1.60% |
|
Dec 21 |
7.75% |
8.79% |
-1.03% |
|
Jan 22 |
-4.89% |
-3.88% |
-1.02% |
|
Feb 22 |
-0.26% |
-2.25% |
1.99% |
|
Mar 22 |
-2.14% |
1.24% |
-3.38% |
|
Apr 22 |
-2.20% |
-2.27% |
0.07% |
|
Total |
2.34% |
0.47% |
1.87% |
|
2021 |
12.72% |
8.06% |
4.66% |
|
2022 |
-9.21% |
-7.03% |
-2.18% |
The buy-and-hold portfolio for this strategy lost 2.20% in April, which was 0.46% better than the individual watchlist. It also proved to be better than the average dividend king universe by 0.07% last month. As a result the alpha generated by this strategy increases from 184 bps to 187 bps since July 2021. The portfolio performed exceptionally well in the 2nd half of 2021 but started out 2022 much weaker.
A significant boost for the buy-and-hold portfolio were positive returns from Hormel (HRL) +2.15%, Altria Group (MO) +6.35% and Tootsie Roll Industries (TR) +0.20% in April. Collectively these 3 stocks made up 13.17% of the buy-and-hold portfolio at the end of March, and added 0.29% to the April return of the portfolio.
Here is the current allocation of the buy-and-hold portfolio as of April 30, 2022. I’ve also included the March 31, 2022 allocation to show you how it has shifted as a result of contributions and market activity.
|
TICKER |
March |
April |
|
ABM |
13.03% |
13.16% |
|
ABT |
2.66% |
2.36% |
|
BDX |
3.05% |
2.67% |
|
CWT |
2.83% |
2.28% |
|
FUL |
10.74% |
11.30% |
|
HRL |
8.37% |
7.87% |
|
LOW |
10.37% |
10.62% |
|
MMM |
2.66% |
3.61% |
|
MO |
1.71% |
1.67% |
|
NDSN |
7.91% |
8.13% |
|
NWN |
4.90% |
4.21% |
|
PH |
2.58% |
2.26% |
|
PPG |
3.60% |
4.49% |
|
SJW |
1.55% |
1.21% |
|
SWK |
7.60% |
7.11% |
|
SYY |
13.35% |
14.20% |
|
TR |
3.09% |
2.85% |
A buy-and-hold approach is a much easier and more tax-friendly investing approach to adopt. Unless a portfolio is held in a tax-free or tax-deferred account, the impact of taxes as a result of moving in and out of positions each month would significantly impact total returns.
Performance For All Dividend Kings In 2022
All 44 dividend kings are down 7.41% year-to-date through month-end April. 25 dividend kings are outpacing the dividend king universe of stocks this year and are driving the return. The remaining 19 dividend kings are all trailing the dividend king universe return.
Best 5 Dividend Kings in 2022:
Worst 5 Dividend Kings in 2022:
Best 5 Dividend Kings in April:
Sysco, the 5th best dividend king in April, was included in the top 8 dividend king list for April. Additionally Altria, the 3rd best dividend king in April, is part of the buy-and-hold portfolio that benefitted from the long term inclusion of this stock.
Summary
I believe that targeting the 8 best dividend kings with the highest forecasted growth rate based on EPS growth forecasts and reversion to fair value will offer excess returns over the dividend king universe of stocks. It may take time to fully see the results; an ideal evaluation period will be 5 years. For some investors, that is a long period of time and I encourage all of you to do further due diligence on…
Read More: My 8 Best Dividend Stocks For May 2022
