As if we didn’t need current geopolitical events to remind us, every ruler has its upsides and downsides. That naturally sparks debate — but just in case you think this phenomenon is confined to Pennsylvania Avenue or Red Square, just make a quick trip to Wall Street, where contention and paradox are ways of life.
For no investment better embodies ups and downs quite like dividend kings: companies that have upped their quarterly payouts to shareholders since at least the age of Kennedy and Khrushchev.
“The main upside to dividend kings are that these firms are typically large, more established, and profitable with an aggregate track record of generating value for shareholders,” says Benjamin A. Jansen, assistant professor of finance at Middle Tennessee State University’s Jones College of Business.
Yes, but …?
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“However, I’m not sure this benefit outweighs the costs of dividend focused strategies,” Jansen says.
Here’s what the professor means: While perhaps tempting to put one’s eggs in a basket lined with robust dividend history, it poses limitations once that strategy becomes exclusionary.
“A strict dividend king investment policy typically leaves out the possibility of investing in firms that may grow tremendously and eventually pay out dividends,” Jansen says.
In other words, not so much dividend kings as future dividend kingpins: companies such as Microsoft Corp. (ticker: MSFT) “as well as firms with a solid record of generating shareholder value while not paying dividends, such as Berkshire Hathaway ( BRK.A, BRK.B).”
Put another way, a king isn’t necessary a home run champ. Consider the term invoked by Robert R. Johnson, a professor at Creighton University’s Heider College of Business: “10 bagger.”
“Legendary fund manager Peter Lynch coined it to describe stocks that increase in value by more than 10 times,” Johnson says. “In the universe of dividend kings, you won’t find many technology stocks, or any FAANG stocks or cannabis firms.”
That noted, dividend kings do have track records that make them stand apart from mere dividend pawns in royal duds.
“Always be careful with high dividend stocks,” says Lee Kranefuss, CEO at The Kranefuss Group in the San Francisco area. “Usually if you create a list of the top 20 dividend stocks in any year, (some make it) because their prices dropped a lot: a stock at $50 paying $1 annually in dividends that suddenly drops to $20 looks like it has a 5 percent dividend yield. But you’d be catching a falling knife. If you want dividends, it should be firms with a long and consistent history of steady dividends and price.”
So how precisely does an investor define a dividend king? One way is to check out the list of those companies that have raised their payouts for the longest period of time — with the highest-ranking royalty passing the 50-year mark. These include Procter & Gamble Co. ( PG), Genuine Parts Co. ( GPC), Emerson Electric Co. ( EMR) at 62 years; and Dover Corp. ( DOV) and Northwest Natural Holding Co. ( NWN) at 63.
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So who’s No.1? It’s not exactly a household name: American States Water ( AWR) at 64 years. It’s dividend king, dividend champion and a few months shy of being a dividend senior — though far from ready for retirement. And for the record, it’s headquartered in San Dimas, California, population 33,000 and a good 2,761 miles from the New York Stock Exchange.
Taking a closer look at AWR, it’s been quite the gusher of returns and not just on the dividend front. Over the past 12 months, the shares of this utility company have climbed without interruption: up roughly a third to $69 a share.
“AWR should do well this year, even if the stock market is flat to lower,” says Chuck Self, chief investment officer at iSectors. “The California water and electric utility has received steady rate hikes from the state and AWR has increased its footprint through acquisitions. Given the must-need basis of its products, the company should see earnings increases in any macroeconomic environment.”
But elsewhere on the dividend king front, crowns wobble in precarious balance. Colgate-Palmolive Co. ( CL) has sat near the top of the heap for 54 years, but investors are far more concerned with its recent history.
Year over year, the stock is down 6 percent, including three stomach-churning, steep plunges. The most recent in December saw CL stumble by 11 percent in 11 days, and this year doesn’t look much better. In late January, the company forecast a surprise drop in 2019 profit, blaming higher raw material costs and a stronger dollar.
How then to look at this? As any expert will tell you, smart investors judge companies on their own merits. While dividend king status may point an arrow in the right direction, it doesn’t necessary mean a bulls eye.
“Companies, like people, have life cycles,” says John H. Robinson, owner of Financial Planning Hawaii in Honolulu. “In fact, their lifecycles tend to be similar to people. Few companies last 100 years.”
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Think about that. “For companies to not only pay dividends for 30-plus years, but also raise them for that period or longer, is a remarkable feat of longevity,” Robinson says. “It requires companies to continue to grow their earnings over time. Mathematically, it is nearly impossible to ask a company to grow its earnings at double-digit rates indefinitely.”
Which gives a new investment twist to an old fairy tale ending: “The king is dead! Long live the king!”
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Why Investors Must Be Careful Chasing Dividends originally appeared on usnews.com
