Published on June 7th, 2022
This is a guest contribution by Kanwal Sarai from Simply Investing.
Investors can follow several different strategies for stocks. Some investors follow momentum strategies, trading stocks with high price gains. Other investors follow a high growth strategy focusing on tech stocks, like Apple (AAPL) and Amazon (AMZN).
Yet another type of investor seeks income by buying and holding high-yield stocks, like utilities and real estate investment trusts (REITs). A fourth approach is dividend growth investing, focusing on stocks that pay a growing dividend annually.
This strategy is increasingly popular, and the type of stocks are categorized into the Dividend Achievers, Contenders, Aristocrats, Champions, and Kings.
What is Dividend Growth Investing?
Dividend growth investing is an approach to buying and holding the stock of companies increasing their dividend annually.
Dividend growth investors are looking to invest in undervalued stocks paying a dividend instead of overvalued stocks that do not. In addition, these investors rationalize that dividends require real cash to pay shareholders and thus are an indicator of the companies’ actual earnings and health.
Furthermore, a company demonstrating the ability to raise the dividend annually over time probably has a good business model. On the other hand, a company cutting or suspending its dividend is obviously struggling.
Dividend growth stocks are sorted into groups called the Dividend Achievers, Contenders, Aristocrats, Champions, and Kings, but what exactly are they?
What are the Dividend Achievers, Contenders, Aristocrats, Champions, and Kings?
Dividend Achievers are companies that have raised their dividends for ten years in a row or more. Besides the 10-year dividend growth streak, companies must be listed on the New York Stock Exchange (NYSE) or Nasdaq and have a three-month average daily trading volume of $1 million.
Currently, there are about 371 Dividend Achievers. Many companies are from the Consumer, Industrials, Financials, and Utilities sectors. In addition, the group includes companies like Microsoft (MSFT), Walmart (WMT), J. M. Smucker (SJM), 3M Company (MMM), etc.
The next category is the Dividend Contenders. They are stocks raising the dividend for between 10 and 24 years. The list is similar to the Dividend Achievers list, but since it is capped at 24 years, the total number of companies is smaller.
Currently, there are around 343 Dividend Contenders. The sector with the most significant representation is Financial Services, followed by Industrials and Utilities. This group includes companies like AbbVie (ABBV), Home Depot (HD), Huntington Ingalls Industries (HII), and many local and regional banks.
The Dividend Aristocrats are companies that have raised their dividends for 25+ years and are a part of the S&P 500 Index. In addition, they must have a minimum market capitalization of $3 billion and a $5+ million average daily trading volume for the three months before the rebalancing date.
At the end of April 2022, 64 companies were members of the Dividend Aristocrats. The number is relatively small because of the stricter requirements. Sectors with the most significant representation are Consumer Staples and Industrials.
Companies on this list are often larger, well-established companies that are market leaders. For example, companies like International Business Machines (IBM), Colgate-Palmolive (CL), Coca-Cola (KO), and Consolidated Edison (ED) are on the list.
The Dividend Champions are like the Dividend Aristocrats. However, the only requirement is increasing the dividend for 25 or more years. Consequently, the number of companies on the list is greater at 131. In addition, the list includes companies that are a part of the Dividend Aristocrats and ones with a market capitalization of less than $3 billion and are not a member of the S&P 500 Index.
The two sectors with the most representation are Industrials and Financial Services.
Smaller companies on this list include Andersons (ANDE), MGEE Energy (MGEE), and Tootsie Roll Industries (TR).
The last category is the Dividend Kings. To attain this status, a company must increase the dividend for 50+ consecutive years. There is no other requirement; however, the task is not an easy one.
Currently, there are only 39 companies on the list, although a few versions of the list set the number higher at 41 because of over-the-counter (OTC) stocks. In addition, there are at least two discrepancies based on record keeping and divestments.
Examples of companies on this list include Federal Realty Trust (FRT), Emerson Electric (EMR), Johnson & Johnson (JNJ), and Proctor & Gamble (PG).
Dividend Aristocrat Highlight: Walmart
A popular Dividend Aristocrat is Walmart (WMT), the world’s largest retailer. Walmart operates roughly 10,500 stores under the Walmart and Sam’s Club brands. The company operates globally in the US, Canada, Mexico, and China. In addition, Walmart extends its reach to other countries through joint ventures. Total revenue was approximately $572.75 billion in fiscal 2022.
Walmart has increased the dividend for 49 years in a row. The dividend rate is $2.24 per share, making the forward dividend yield approximately 1.79%. In addition, the payout ratio is low at 34%, allowing for more increases.
Walmart recently missed first-quarter estimates and lowered guidance causing the stock price to drop. The valuation has declined to about 19.5X within the range for the past 10-years and below the range in the past 5-years.
Dividend King Highlight: 3M
A favorite Dividend King of investors is 3M Company (MMM), the industrial conglomerate. The company makes 60,000+ items, including adhesives, abrasives, laminates, personal protective equipment, films, paints, connecting and insulating materials, medical products, etc. 3M’s recognized consumer brands are Scotch, Post-It, Filtrete, Nexcare, ACE, Scotch-Brite, Command, Scotchguard, Tegaderm, and Futuro.
3M has the distinction of being on the list of Dividend Kings, Dividend Aristocrats, Dividend Champions, and Dividend Achievers because it has increased the dividend for 64 consecutive years and is a member of the S&P 500 Index.
The forward dividend rate is $5.96 per share, and the dividend yield is about 4.08%, above the 5-year average of 3.10%. The payout ratio is ~58%. The dividend growth rate is 5.92% CAGR in the past 5-years and 10.41% CAGR in the past 10-years.
3M’s stock price has been under pressure because of supply chain disruptions, inflation, and litigation for PFAS and ear plugs. The stock is priced at an earnings multiple of 13.7X, below the 5-year and 10-year range.
Which stocks should I invest in?
At the end of the day the most important question for investors is: Which stocks should I invest in? The simple answer is: Invest in quality dividend paying stocks when they are priced low (undervalued). The Simply Investing online course teaches you exactly how to identify when a stock is a quality stock (and when it isn’t a quality stock), and when a stock is undervalued (and overvalued).
A simple checklist of 12 rules of investing helps you to select quality stocks when they are undervalued, and easily filter through the list of dividend Achievers, Contenders, Aristocrats, Champions, and Kings.
Other Dividend Lists
The following lists contain many more high-quality dividend stocks:
- The Dividend Aristocrats List is comprised of 65 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 38 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.