There are no better stocks for long-term dividend growth and creating passive income than the Dividend Kings. They have stood the test of time.

The Dividend Kings are a select group of stocks because it takes 50 years of dividend growth to make it onto the list. Only 42 out of over 6,000 stocks traded on United States stock exchanges exist. The success rate is less than 1%, nearly as low as being struck by lightning.

For example, Walmart (WMT) became a Dividend King in 2023, meaning the dividend increase streak started in 1973. Over this period, Walmart’s dividend growth persisted through the OPEC oil embargo, record inflation, the Gulf War, the breakup of the Soviet Union, the dot-com boom and bust, the Great Recession, and the COVID-19 pandemic.

Peter Lynch, the renowned Fidelity money manager, is one of the best stock pickers in the world. He is obviously worth listening to about investing. But his view is different from Wall Street traders. When it comes to choosing stocks, Peter Lynch said,

“This is one of the keys to successful investing: focus on the companies, not on the stocks.”

Investors who focused on Walmart as a company realized its low prices and no-frills approach to retailing was a long-term competitive advantage.

The Dividend Kings are successful partly because of their business models and because they consistently return cash to shareholders via dividends.

Below are 3 Dividend Kings with high dividend quality scores for long-term investors.

American States Water

American States Water (AWR) has the distinction of the longest dividend growth streak of any stock at 69 years. Moreover, it is one of three water utilities on the Dividend Kings list. Water is an essential service for everyone. The company grows slowly with population. But water utilities usually have a monopoly in their service area. A necessary product combined with little competition translates to long-term shareholder returns.

Today, American States Water serves about 263,000 water customers in ten counties in California, including the Los Angeles metropolitan area, in its regulated business. It also provides electricity to ~25,000 customers. Additionally, the utility owns a non-regulated water and wastewater service business with 50-year privatization contracts on 11 U.S. military bases.

American States Water’s business model and status as a water stock lets it grow slowly but steadily each year. This growth has translated to long-term dividend growth of approximately 9% annually. Unfortunately, the stock only yields 1.7%, but the dividend safety is excellent. The payout ratio is around 59%, low for a utility, and the dividend safety grade is an A+.

Currently, American States Water is on track to become the first company with 70 years of dividend growth.

• Ticker: AWR
• Market Cap: $3.43 billion
• Annual Dividend Rate (FWD) Per Share: $1.59
• Dividend Yield: 1.71%

Source: Portfolio Insight*

Procter & Gamble

A popular Dividend King is Procter & Gamble (PG), the household products company based in Cincinnati, Ohio. This company is one of the largest consumer packaged goods companies, with 21 brands with annual sales of $1+ billion. The firm’s well-known products include Tide, Pantene, Secret, Gillette, Bounty, Pampers, Old Spice, Secret, Swiffer, Charmin, etc.

Procter & Gamble is popular for a reason. Its volatility is lower than the market average because it sells products everyone needs. Over time, this has allowed the firm to pay a growing dividend for 67 consecutive years. Additionally, Procter & Gamble has a 132-year streak of paying dividends, meaning it did so during difficult business conditions, like the Great Depression and Recession.

The forward dividend yield is approximately 2.4%, supported by a payout ratio of 63%. The dividend’s growth rate is nearly 6% annually. Procter & Gamble has an A+ dividend quality grade with a solid balance sheet. 

Moreover, the products Procter & Gamble sells are bought year-round regardless of economic conditions. Hence, the stock is an excellent Dividend King for long-term investors.

• Ticker: PG
• Market Cap: $356.1 billion
• Annual Dividend Rate (FWD) Per Share: $3.65
• Dividend Yield: 2.42%

Source: Portfolio Insight*

Parker-Hannifin

The Parker-Hannifin (PH) Company is probably the least well-known of the three stocks on this list. But the company is large, with a market capitalization of $40+ billion. Sales were $15.9 billion in 2023. In addition, the company was founded in 1917 in Cleveland, Ohio. Today, it designs and manufactures industrial and aerospace parts for other manufacturers, which may be why it is less well-known than the other Dividend Kings.

However, Parker-Hannifin has been successful over time, allowing it to pay a growing dividend for 67 years. Moreover, the dividend rate is supported by a conservative payout ratio of almost 27% and a dividend quality score of an ‘A.’ As a result, it should be safe even during an economic recession. 

The dividend has grown at a double-digit rate of roughly 12% in the past decade. So, even though the yield is only ~1.7%, the passive income stream will snowball, making this stock an excellent Dividend King for long-term investors.

• Ticker: PH
• Market Cap: $40.43 billion
• Annual Dividend Rate (FWD) Per Share: $5.32
• Dividend Yield: 1.69%

Source: Portfolio Insight*

Bottom Line

Investors should focus on quality stocks with sound business models like the Dividend Kings when thinking long-term. Based on past history, these stocks have a lower risk of a dividend cut. Furthermore, they can create a growing passive income stream by reinvesting the dividends. Over a sufficiently long period, a portfolio of stocks can make thousands of dollars in annual income. 

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