I am a strong promoter of companies that benefit shareholders by distributing dividends. While many companies refuse to do so in order to keep the cash for future investments, I believe that since a shareholder carries risk in regards to the companies success, he or she should also reap a reward from his investment and participate in the companies profits.
There is obviously no guarantee for any company to generate profits for a lifetime, but there are companies that have paid dividends and rewarded their shareholders in a very reliable manner.
Dividend Kings and Dividend Aristocrats
The terms Dividend Kings and Dividend Aristocrats are being associated with companies that have not only distributed dividends for 50 or 25 years respectively without a single interruption. They also have never lowered the dividend payout but increased it every single year.
For investors who are looking for a regular income to receive out of their investments, these are the stocks that might be the most attractive ones to look at, as they earned a status that promises a relatively secure financial future. A promise of paying out dividends for as long as one stays invested.
This is not only tempting for retirement investors who are looking to secure their nest egg while continue generating a steady cash-flow. It is even more interesting to young investors who possess two important traits: Time and patience. The magic words that come into play here are “compounding dividends”.
Stocks that generate regularly increasing income do not only secure a return on your investment. But given enough time, they might easily outgrow it by ridiculous amounts. How is this possible?
For these companies, revenue and profit growth lead to dividend increases. If a company can grow its dividend by 10% year on year, it will almost double it’s dividend payouts within 6 years.
So for example, if you buy now shares of AT&T (the biggest telecom provider in the US) which yield 5.8% at the time of writing this article, and AT&T would increase its dividend by 10% year on year, then over the next 6 years your return on investment would grow year on year and reach a return of over 11% by 2025. This would look like this:
2019 = 5.80 %
2020 = 6.38 %
2021 = 7.02 %
2022 = 7.72 %
2023 = 8.49 %
2024 = 9.34 %
2025 = 10.27 %
2026 = 11.30 %
The power of time and patience
So just imagine how this will play out if you keep holding the stock for another 30 years. At some point, your yield on investment might actually outgrow your initial investment. Every. Single. Year. Ridiculous? Crazy? Impossible? Not at all. Let me bring up the greatest investor of all times: Mr Warren Buffet.
One of the largest investments in his lifetime was to put money into Coca Cola. Not only did the value of the company shares appreciate over his lifetime but so did the dividends. From what I was reading, his annual dividends on Coca Cola offer a yield on cost of anything between 40-55% – depending on which source you follow.
Just think of it: You put 100.000$ in a company and given enough time it will return to you between 40.000-55.000$ – every single year. And not only that, but it keeps growing and you don’t need to lift a finger.
The astonishing thing is that Coca Cola and AT&T are not the only examples out there. As of the time of writing, the 2019 list of Dividends Kings has these companies on it:
- Amer. States Water(AWR)
- Dover (DOV)
- Northwest Nat. (NWN)
- Emerson Electric (EMR)
- Genuine Parts (GPC)
- Procter & Gamble (PG)
- Parker Hannifin (PH)
- 3M (MMM)
- Cincinnati Fin. (CINF)
- Johnson &Johnson (JNJ)
- Coca-Cola (KO)
- Lancaster Colony (LANC)
- Lowe’s (LOW)
- Colgate-Palmolive (CL)
- Nordson (NDSN)
- F & M Bank (FMCB)
- Tootsie Roll Industries (TR)
- Hormel Foods (HRL)
- ABM Industries (ABM)
- California Water Services (CWT)
- Federal Realty Inv. Trust (FRT)
- Stepan (SCL)
- SJW Group (SJW)
- Stanley Black & Decker (SWK)
- Target (TGT)
- Commerce Bancshares (CHSH)
Personally, I haven’t bought a single Dividend King stock yet. I have two current Dividend Aristocrats in my portfolio, namely AT&T (T) and AbbVie (ABBV). And I am purchasing stocks that I expect to become a Dividend Aristocrat at some point in the future. Apple (AAPL) is such a company as is Starbucks (SBUX) which I also both owe.
Over the next two years, I am planning to purchase several of the official Dividend Aristocrats and to add them to my portfolio. I am currently looking at 3M, Coca Cola, and Target and will probably purchase some shares within this or during the first quarter of the next year.
I am not entirely focused on dividends only, but having a good mix of shares that offer great potential for growth as well as companies that will secure me a steady cash-flow and grow it year on year is a pretty great combination. Dividends can be an investor’s best friend as they create exactly what every FIRE aspirant is looking for: A steadily growing passive income.
Disclosure: I own shares of AT&T, AbbVie, Apple and Starbucks.