Dividend Kings
The Dividend Kings are an elite group of companies that have all paid and increased dividends for at least 50 consecutive years. There are multiple lists of the kings on the internet, some that include more than 49companies. I have chosen to use the list that was updated on March 1, 2023, and includes one new dividend king this month. The newest dividend stock added to the list of Dividend Kings is Walmart (WMT). The list also included one deletion, V.F. Corporation (VFC) has been dropped from the list following its recent dividend cut. $Wal-Mart(WMT)$ $VF Corp(VFC)$
The 49 companies on the dividend king list span 9 unique sectors, offer an average dividend yield of 2.62% and have an average 5-year dividend growth history of 7.01%. Even though all 49 of these companies share the status of anelite dividend stock, not all will offer great returns going forward. So, how can an investor identify the dividend kings that have a higher chance of offering better returns?
In myprior article, I shared a method for selecting the dividend kings that present the best opportunity for better than average future returns. The method leverages a long-term pattern of correlation between share price appreciation and long-term earnings growth. The pattern is more evident when applied to a group of stocks and measured over a longer time period. While this method may not work for all stocks, it can help identify a group of stocks that collectively can outperform a universe of stocks.
First, let me explain in more detail how and why this strategy may work, and then I'll share the real results.
EPS Growth Combined With Valuation
Forecasted EPS growth rates are a useful indicator of future returns, but this factor can be strengthened when combined with the current valuation of a given stock. My preferred method of valuation for dividend stocks is dividend yield theory. The premise is simple: if the current dividend yield exceeds the trailing dividend yield, a stock is considered to be potentially undervalued and vice versa.
I have decided to test this theory on the dividend king universe of stocks going forward. Each month, I will select roughly the top quarter of dividend kings that present the best-forecasted EPS growth rate combined with current valuation. I will be using analyst forecasted 5-year EPS growth rates. Current valuation will be computed using current and trailing dividend yields obtained from Seeking Alpha.
I will assume that a given stock can return to fair valuation within a 5-year period that aligns with the forecasted EPS growth rate. Potentially undervalued stocks will be awarded a boost to their forecasted EPS growth rate equivalent to the annualized rate of return necessary to bring the share price back to fair value within the 5-year period. Overvalued stocks will be penalized using the same principle in reverse.
The best way to apply and measure the success of this strategy is through a buy-and-hold portfolio. I have been tracking how such a portfolio is working out, and I will share those results later on in the article.
Past Performance
The table below shows the returns for the chosen dividend kings using this methodology for the time period of July 2021 through February 2023.
Ticker | Jul 21 | Aug 21 | Sep 21 | Oct 21 | Nov 21 | Dec 21 | Jan 22 | Feb 22 | Mar 22 | Apr 22 | May 22 | Jun 22 | Jul 22 | Aug 22 | Sep 22 | Oct 22 | Nov 22 | Dec 22 | Jan 23 | Feb 23 |
ABM | 4.83% | 6.52% | -9.11% | -1.82% | 2.25% | -9.22% | 2.52% | 7.53% | 2.70% | -0.78% | -10.20% | 6.68% | ||||||||
ABT | -5.37% | -1.87% | 0.62% | -5.74% | ||||||||||||||||
BDX | 6.42% | 1.06% | ||||||||||||||||||
CINF | -0.39% | -6.98% | ||||||||||||||||||
CWT | 12.86% | 1.75% | 3.98% | 3.50% | ||||||||||||||||
FUL | 1.86% | 4.57% | -4.45% | 9.50% | 3.76% | 10.72% | -11.40% | -3.36% | 1.22% | 6.57% | 6.97% | 1.03% | -7.34% | -3.52% | ||||||
GRC | 2.63% | |||||||||||||||||||
GWW | 19.45% | 3.49% | -7.76% | 5.97% | 13.69% | |||||||||||||||
HRL | -1.81% | -9.97% | 3.81% | -2.17% | 17.90% | |||||||||||||||
KMB | -3.82% | |||||||||||||||||||
LEG | 1.60% | 5.51% | -8.29% | 13.43% | ||||||||||||||||
LOW | -0.25% | 5.81% | -0.51% | 15.68% | 4.61% | 5.68% | -7.87% | -6.86% | -1.82% | -10.56% | 10.26% | 1.36% | -3.26% | 4.37% | 9.03% | -6.26% | 5.05% | -1.20% | ||
MMM | -9.57% | 0.15% | -3.13% | |||||||||||||||||
MO | -3.33% | 5.00% | 2.87% | 14.59% | 0.67% | 0.16% | -1.47% | 3.09% | ||||||||||||
MSA | 6.04% | -5.04% | 6.00% | -7.06% | -8.06% | 22.84% | 5.39% | 2.26% | -5.41% | -1.17% | ||||||||||
NDSN | -0.19% | 6.74% | 0.63% | -8.90% | -2.39% | 0.26% | -5.02% | -7.09% | -6.56% | 6.00% | 5.11% | 0.80% | 2.35% | -9.49% | ||||||
NUE | -0.93% | |||||||||||||||||||
NWN | -0.91% | -4.37% | 13.13% | |||||||||||||||||
PH | 1.60% | -4.60% | 1.01% | -9.60% | 17.49% | -2.66% | ||||||||||||||
PPG | -9.42% | -14.23% | -1.78% | -2.35% | -0.71% | -9.61% | 13.08% | -1.31% | -12.83% | 3.15% | 1.81% | |||||||||
SJW | 8.89% | |||||||||||||||||||
SWK | -1.92% | -8.92% | 2.52% | -2.33% | -7.41% | -6.84% | -13.64% | -14.05% | -1.22% | -11.07% | -7.18% | -9.48% | -13.83% | 4.36% | 5.13% | -8.08% | 18.89% | |||
SYY | -3.98% | 7.35% | -0.85% | -2.04% | -8.92% | 12.15% | 0.08% | 11.45% | -5.72% | 4.69% | -1.52% | 1.21% | 0.22% | -3.16% | -14.00% | 23.23% | -0.06% | -11.63% | 1.97% | -3.73% |
TGT | -12.76% | 15.68% | -1.27% | -7.45% | 10.69% | 2.33% | ||||||||||||||
TNC | -3.24% | -4.80% | 13.13% | -9.60% | -6.28% | 2.99% | 9.53% | -3.09% | 13.90% | 0.98% | ||||||||||
TR | 1.42% | -3.85% | ||||||||||||||||||
VFC | -14.35% | 12.06% | -19.78% | |||||||||||||||||
Return | 3.40% | 2.21% | -4.73% | 4.19% | -1.31% | 7.18% | -5.17% | -3.28% | -2.91% | -2.66% | 1.36% | -6.91% | 7.39% | -1.85% | -8.39% | 10.30% | 4.43% | -5.35% | 5.75% | -1.87% |
Benchmark | 1.71% | 0.83% | -5.33% | 4.05% | -1.68% | 8.79% | -3.88% | -2.25% | 0.97% | -2.41% | -0.10% | -5.39% | 5.52% | -1.21% | -8.34% | 10.85% | 6.60% | -3.95% | 3.10% | -2.06% |
Alpha | 1.70% | 1.37% | 0.60% | 0.13% | 0.36% | -1.61% | -1.29% | -1.04% | -3.88% | -0.25% | 1.46% | -1.52% | 1.87% | -0.63% | -0.05% | -0.55% | -2.17% | -1.40% | 2.64% | 0.19% |
Seven of the 11 chosen dividend kings for February finished the month with a return better than the average dividend king universe. The selected kings collectively posted a loss of 1.87%, outperforming the average dividend king universe return by 0.19%. The main drivers of outperformance were: Grainger (GWW) +13.69%, Altria Group (MO) +3.09%, PPG Industries (PPG) +1.81% and Tennant Company (TNC) +0.98%. 2 of the chosen kings performed very poorly during the month, they were: Nordson (NDSN) -9.49% and V.F. Corporation (VFC) -19.78%. This watchlist doesn't beat the average dividend king universe return every month, but in the long run it is still performing well. A better measure for this strategy is with a buy-and-hold approach that is discussed later in this article.
Part of this long-term strategy is to identify Dividend Kings that are out of favor. Because of this, the initial results for this watchlist can be lower than the Dividend King universe. I believe this strategy can generate alpha if given enough time to benefit from targeting out of favor stocks.
12 Best Dividend Kings For March
The number of selected dividend kings for the month of March was increased by 1 to better align with my intention of choosing 25% of the dividend kings each month.
Since this method relies on two factors that are constantly changing, it is likely that we will experience a high turnover rate with this strategy. I have updated the analysts' expected future earnings growth rates for all the dividend kings and applied the necessary valuation adjustments. Here are the 12 dividend kings with the best expected future growth rates for March.
Created by Author
There are five changes from the prior month: Grainger, Nucor (NUE), PPG Industries and V.F. Corporation are replaced by Abbott Labs (ABT), California Water Service (CWT), Leggett & Platt (LEG), S&P Global (SPGI) and Stanley Black & Decker (SWK). Since S&P Global is appearing in the top list for the very first time this change will expand the number of holdings in the buy-and-hold portfolio. The inclusion of one extra dividend king this month meant that Altria Group (MO) made the cut.
S&P Global started the year off very strong with a gain of 11.94% in January, February was less favorable as the stock fell 8.76%.
Please note that this stock selection strategy focuses solely on quantitative data. Further due diligence is necessary to ensure there are no major negative catalysts for each dividend king.
Buy And Hold Strategy
In addition to tracking the returns for the best dividend kings each month, I also track how a buy-and-hold portfolio has performed for this stock selection method.
EPS + Value | Benchmark | Alpha | |
Jul 21 | 3.40% | 1.71% | 1.70% |
Aug 21 | 1.99% | 0.83% | 1.16% |
Sep 21 | -5.05% | -5.33% | 0.28% |
Oct 21 | 4.54% | 4.05% | 0.48% |
Nov 21 | -0.07% | -1.68% | 1.60% |
Dec 21 | 7.75% | 8.79% | -1.03% |
Jan 22 | -4.89% | -3.88% | -1.02% |
Feb 22 | -0.26% | -2.25% | 1.99% |
Mar 22 | -2.14% | 0.97% | -3.11% |
Apr 22 | -2.20% | -2.41% | 0.21% |
May 22 | 0.79% | -0.10% | 0.89% |
Jun 22 | -7.12% | -5.39% | -1.73% |
Jul 22 | 6.01% | 5.52% | 0.49% |
Aug 22 | -1.82% | -1.21% | -0.61% |
Sep 22 | -10.01% | -8.34% | -1.67% |
Oct 22 | 12.00% | 10.85% | 1.15% |
Nov 22 | 6.49% | 6.60% | -0.11% |
Dec 22 | -5.72% | -3.95% | -1.77% |
Jan 23 | 4.38% | 3.10% | 1.28% |
Feb 23 | -1.39% | -2.06% | 0.67% |
Total | 3.85% | 3.56% | 0.29% |
2021 | 12.72% | 8.06% | 4.66% |
2022 | -10.50% | -5.10% | -5.39% |
2023 | 2.93% | 0.98% | 1.95% |
Cumulative | 3.85% | 3.56% | 0.29% |
Annualized | 2.29% | 2.12% | 0.17% |
The buy-and-hold portfolio for this strategy posted a loss of 1.39% in February. It outperformed the average dividend king universe return and the monthly watchlist last month. As a result, the alpha generated by this strategy increased to +0.17% from -0.26%, on an annualized basis. Once again the buy-and-hold portfolio is generating alpha over the average dividend king universe. This portfolio performed very well in 2021, did not do so well in 2022, but is off to a good start in 2023.
The 6 largest positions in this portfolio made up 51.51% of the total market value at the start of February. Their average return last month was a loss of 2.36%, which was unfavorable, however the remaining holdings in the portfolio picked up the slack. The 6 largest holdings at the end of January, their allocation and February returns are:
- Sysco (SYY) 10.71%. -3.73%
- Lowe's (LOW) 9.73%. -1.20%
- H.B. Fuller (FUL) 8.54%. +1.22%
- ABM Industries (ABM) 7.86%. +3.20%
- Nordson (NDSN) 7.64% -9.49%
- Stanley Black & Decker (SWK) 7.03% -4.14%.
Other holdings in the portfolio have been growing in size due to more frequent inclusion on recent top 11 lists and favorable market returns. PPG Industries had an allocation of 5.50% at the start of February and at the end of the month increased to 5.86%. Tennant Company (TNC) started the month with an allocation of 5.01% and finished with 5.33%.
Here is the current allocation of the buy-and-hold portfolio as of February 28, 2023. I've also included the January 31, 2023, allocation to show you how it has shifted as a result of contributions and market activity.
TICKER | February | January |
ABM | 7.83% | 7.86% |
ABT | 1.91% | 2.15% |
BDX | 1.24% | 1.38% |
CINF | 1.13% | 1.10% |
CWT | 2.41% | 2.66% |
FUL | 8.34% | 8.54% |
GRC | 0.47% | 0.50% |
GWW | 2.68% | 1.98% |
HRL | 3.27% | 3.46% |
KMB | 0.43% | 0.00% |
LEG | 1.86% | 2.04% |
LOW | 9.72% | 9.73% |
MMM | 1.36% | 1.48% |
MO | 4.10% | 3.65% |
MSA | 4.96% | 4.74% |
NDSN | 7.08% | 7.64% |
NUE | 0.44% | 0.00% |
NWN | 2.11% | 2.27% |
PH | 4.03% | 3.85% |
PPG | 5.86% | 5.50% |
SJW | 0.77% | 0.81% |
SWK | 6.50% | 7.03% |
SYY | 10.38% | 10.71% |
TGT | 2.95% | 3.11% |
TNC | 5.33% | 5.01% |
TR | 1.74% | 1.83% |
VFC | 1.11% | 0.97% |
A buy-and-hold approach is a much easier and more tax-friendly investing approach to adopt. Unless a portfolio is held in a tax-free or tax-deferred account, the impact of taxes as a result of moving in and out of positions each month would significantly impact total returns.
Performance For All Dividend Kings In 2023
All 49 dividend kings hold onto a positive return in 2023 after February, on average gaining 0.80%. 20 dividend kings are outpacing the dividend king universe of stocks this year and are driving the return. The remaining 28 dividend kings are all trailing the dividend king universe return.
Best 5 Dividend Kings in 2023: $Nucor(NUE)$ $Parker Hannifin(PH)$ $W.W. Grainger(GWW)$ $Cincinnati(CINF)$ $Tennant(TNC)$
- Nucor (NUE) +27.04%
- Parker-Hannifin (PH) +21.37%
- Grainger (GWW) +20.48%
- Cincinnati Financial (CINF) +17.88%
- Tennant Company (TNC) +15.02%.
Worst 5 Dividend Kings in 2023:
- Emerson Electric (EMR) -13.38%
- Johnson & Johnson (JNJ) -12.63%
- Black Hills Corp. (BKH) -11.84%
- National Fuel Gas Company (NFG) -9.51%
- 3M Company (MMM) -8.95%.
Best 5 Dividend Kings in February:
- Grainger (GWW) +13.69%
- Parker-Hannifin (PH) +8.34%
- Cincinnati Financial (CINF) +6.67%
- Genuine Parts Company (GPC) +5.39%
- AbbVie (ABBV) +4.16%.
1 of the top 5 dividend kings in February was part of my top 11 list for last month. Additionally, Cincinnati Financial and Parker Hannifin are part of the buy-and-hold portfolio.
Summary
I believe that targeting the 11 best dividend kings with the highest forecasted growth rate based on EPS growth forecasts and reversion to fair value will offer excess returns over the dividend king universe of stocks. It may take time to fully see the results; an ideal evaluation period will be 5 years. For some investors, that is a long period of time, and I encourage all of you to do further due diligence on any of the companies I mentioned prior to investing. So far, this simple strategy is working out okay, and I look forward to seeing what this method has to offer in the future.
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