The 10 Best Dividend Kings For Long-Term Total Returns

When it comes to high-quality dividend growth stocks, the Dividend Aristocrats are hard to beat. The Dividend Aristocrats are a group of 53 stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases.

The Dividend Aristocrats are a great source of dividend growth stocks, but there is a smaller group of stocks with an even longer history of dividend increasesThe Dividend Kings are a group of just 25 stocks, each with 50+ consecutive years of dividend growth.

This article will discuss the top 10 Dividend Kings found in the Sure Analysis Research Database, based on expected future returns.

All 10 stocks on the list have increased their dividends for at least 50 years, and have a strong brand with durable competitive advantages. They should continue to increase their dividends each year, and generate positive returns for shareholders.

Dividend King No. 10: Illinois Tool Works 

  • Expected Annual Return: 6%-7%

Leading off is diversified industrial manufacturer Illinois Tool Works (ITW). Over the 100+ years in the company’s operating history, Illinois Tool Works steadily expanded into new products and geographic markets. Today, Illinois Tool Works has a market capitalization of $50 billion, and generates annual revenue of more than $13 billion. It has a large portfolio, with strong growth potential across its core markets.

ITW Portfolio

Source: Investor Day Presentation, page 24

Over time, Illinois Tool Works has reshaped its portfolio, to expand in growing categories, and exit non-performing areas. Illinois Tool Works’ current portfolio is diversified across industry groups, including automotive, food equipment, electronics, welding, polymers & fluids, and construction products. Its continuous portfolio evaluation process has allowed it to stay ahead of the competition, and grow steadily over many decades.

In the 2018 first quarter, total revenue increased 8%, driven by 3% organic growth. Operating income rose by 12% for the quarter. Earnings-per-share increased 23%, due to revenue growth, margin expansion, and share repurchases. For the full year, Illinois Tool Works expects 17% earnings growth at the midpoint of guidance.

The only negative for Illinois Tool Works is current valuation. With a current share price of $147 and a fair value estimate of $128, we believe the stock is undervalued. A declining price-to-earnings ratio could result in negative annual returns of approximately 3% per year, over the next five years. Still, the stock can generate positive returns, through earnings growth and dividends. We expect Illinois Tool Works to grow earnings by 7% per year. Combined with a 2.1% dividend yield, total returns are expected in the 6%-7% range each year.

Dividend King No. 9: SJW Group 

  • Expected Annual Return: 6%-7%

SJW was founded in 1866 and was initially known as the San Jose Water Company. SJW is a water utility company that produces, purchases, stores, purifies and distributes water to consumers and businesses. SJW currently consists of three subsidiaries: San Jose Water Company, SJWTX, Inc., and SJW Land Company.

San Jose Water Company, a regulated utility, has almost 230,000 connections and provides water to nearly one million people in the Silicon Valley area. SJWTX is a regulated water utility company that supplies water to more than 40,000 people in the area between San Antonio and Austin, Texas. The company also has a small real estate division that owns and develops properties for both residential and warehouse customers in California and Tennessee.

SJW Summary

Source: Investor Presentation, page 6

On 3/14/2018 SJW announced that it will be merging with Connecticut Water Service (CTWS), which will add 135,000 customers in Connecticut and Maine to SJW’s customer base. SJW shareholders will own approximately 60% of the combined company. SJW believes the deal will be accretive to earnings in the first year, due to cost synergies.

Perhaps the biggest reason that SJW has attained Dividend King status, is its competitive advantage. As a water utility, SJW operates in a highly regulated industry that would make it virtually impossible for a new company to enter and take market share. In addition, water is a necessity for human survival, which basically ensures a steady stream of cash flow for the company.

The other benefit for a regulated utility is that it can pass along rate hikes each year. For example, San Jose Water was granted a rate increase of 4.2% for 2018. The company also submitted its application for rate increase for 2019-2021. If granted, San Jose Water will be able to see increases of 9.8%, 3.7% and 5.2% for 2019, 2020, and 2021, respectively.

Because of these various advantages, water utilities generate surprisingly strong growth rates. On 4/25/18 SJW reported first-quarter results. Revenue increased 8.6% year over year, due to higher customer usage, new customers, and higher rates.

SJW stock trades for a price-to-earnings ratio of 23.6. At $63, the stock appears overvalued, as we have a fair value price of $53. Even though a declining valuation could reduce annual returns by ~3% per year, the stock can still generate annual returns of 6%-7%, due to 8%-10% earnings growth plus dividends.

Dividend King No. 8: 3M 

  • Expected Annual Return: 7%-8%

Next is another diversified industrial manufacturer. 3M (MMMhas a portfolio of more than 60,000 products that are used in homes, offices, hospitals, schools and businesses around the world. The company sells its products in more than 200 countries. It has five main operating segments: Industrial, Safety & Graphics, Healthcare, Electronics & Energy, and Consumer.

3M has raised its dividend for 60 consecutive years. Its long history of dividend growth is due to the company’s competitive advantages. 3M has a reputation for product innovation, thanks to its technology and intellectual property.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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