Dividend Kings are companies that have increased their dividend payouts for at least 50 consecutive years. These are remarkable companies that have maintained regular dividend increases even in periods of economic recessions, market crashes, technology revolutions, and shifting consumer tastes.
David Van Knapp presented an elegant quality scoring system in this article on high-quality, high yield dividend growth (DG) stocks. The system employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator for a maximum of 25 points.
I introduced slight modifications to the quality scoring system and presented a way to break ties to allow stocks to be ranked. In this article, I use a slightly modified version of David Van Knapp’s quality scoring system to rank the 28 Dividend Kings.
The article includes tables listing key metrics, quality indicators, key metrics, and fair value estimates. Each table also includes the so-called Chowder Number (CDN), a metric that favors stocks likely to produce annualized returns of at least 8%.
Why Consider the Dividend Kings?
Dividend Kings have performed quite well when compared to the S&P 500. While tracking the performance of the Dividend Kings suffers from survivorship bias, nevertheless, it is informative to consider historical performance.
Simply Safe Dividends provides an informative analysis:
An investment of $100,000 in the S&P 500 index in 1991 would have grown to nearly $1.4 million at the end of 2017, at a compound annual growth rate of 10.2%. In comparison, the same investment in the current Dividend Kings would have grown to about $3.2 million, for annual returns of 13.8%.
Notwithstanding the survivorship bias issue, the Dividend Kings’ outperformance is significant. Furthermore, over the 27-year period, a portfolio of the Dividend Kings exhibited annual volatility of 12.5%, which is much lower than the volatility of the S&P 500 index of 17.3% over the same period.
Assessing Quality and Ranking Stocks
I’ve used a modified version of David Van Knapp’s to rank Dividend Aristocrats and Dividend Champions. As mentioned earlier, the system references five quality indicators, assigning 0-5 points to each quality indicator for a maximum score of 25 points.
Here are the quality indicators used in determining a stock’s quality score:
Value Line (VL) Safety Rank
Value Line (VL) Financial Strength rating
Morningstar (M*) Economic Moat
Standard & Poor’s (S&P) Credit Rating
Simply Safe Dividends’ (SSD) Dividend Safety Score
Here is the scoring system and the color-coding scheme used in determining quality scores:
Modified version of David Van Knapp’s quality scoring system.
My modifications include assigning 3 points to companies that don’t have an S&P Credit Rating but carry no debt. In order to rank DG stocks, I break ties by considering the following factors, in turn:
Dividend Safety Score
S&P Credit Rating
My color coding scheme is similar to the one used in the original article, though I differentiate perfect scores.
For example, since Johnson & Johnson (JNJ) and Procter & Gamble (PG) both have quality scores of 25 and dividend safety scores of 99, I use the S&P Credit Rating as the tie-breaker. So JNJ wins out because it has an AAA credit rating.
Key Metrics and Fair Value Estimates
In addition to quality indicators and quality scores, I provide columns with key metrics of interest to DG investors, including years of consecutive dividend increases (Yrs), the dividend Yield for a recent stock Price, and the five-year compound annual dividend growth rate (5-Yr DGR).
Furthermore, I provide a fair value estimate (Fair Val.) to help identify stocks that trade at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to the fair value estimate.
To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox.io. Additionally, I estimate fair value using the five-year average dividend yield of each stock using data from Simply Safe Dividends.
With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.
The Chowder Number
In the tables, I’m also including the Chowder Number (CDN), a popular metric for screening DG stocks for possible investment. Named for the SA author Chowder, the metric favors DG stocks likely to produce annualized returns of 8%. Essentially, you add the current dividend yield and the five-year annual dividend growth rate to obtain the CDN.
Chowder used 8 as a minimum number for utilities yielding at least 4%, 12 for stocks yielding at least 3%, and 15 for stocks yielding less than 3%.
I’ve added the CDN to my spreadsheets and I’m planning to include it in future articles. The CDN column will be color-coded as follows:
Green indicates suitable candidates (stocks likely to deliver annualized returns of 8%)
Yellow indicates possible candidates (stocks less likely to deliver annualized returns of 8%)
Red indicates unsuitable candidates (stocks unlikely to deliver annualized returns of 8%)
I use 5 as the threshold number for utilities yielding at least 4%, 8 for stocks yielding at least 3%, and 10 for stocks yielding less than 3%.
So, for example, for stocks yielding at least 3%:
red < 8 ≤ yellow < 12 ≤ green
Dividend Kings with Perfect Quality Scores
The top-ranked Dividend Kings are JNJ and PG, both earning perfect scores of 25.
I own both stocks in my DivGro portfolio (as highlighted in the Ticker column). PG is trading at a premium to fair value, but JNJ is trading below fair value and may be worth a look.
Dividend Kings with Quality Scores of 20-24
The stocks in the second group also fall in the Highest Quality category but failed to earn the highest score for at least one of the quality indicators.
I own five of these stocks, 3M (MMM), Coca-Cola (KO), Lowe’s (LOW), Hormel Foods (HRL), and Stanley Black & Decker (SWK).
MMM is trading below fair value and has a favorable CDN of 14. LOW also trades below fair value, and its CDN looks very favorable. As for KO, HRL, and SW, they all trade above fair value. HRL’s CDN looks great, but the same cannot be said for KO and SWK. Perhaps it is time to scrutinize my investments in KO and, particularly, SWK.
None of the other stocks offer particularly compelling cases, I’m afraid. A possible exception is Parker-Hannifin (PH), which trades just above fair value and offers a CDN of 13.
PH is a manufacturer of motion and control technologies and systems, providing precision-engineered solutions for a range of mobile, industrial and aerospace markets. Customers include original equipment manufacturers and end-users in industries such as manufacturing, packaging, processing, transportation, and equipment industries. PH was founded in 1918 and is headquartered in Cleveland, Ohio.
PH’s price line is above the primary valuation line (orange) and above the normal P/E ratio (blue), so the stock is trading at a premium to fair value. An investment in PH in July 2009 would have returned 17.2% on an annualized basis (including dividends), whereas the S&P 500 returned only 13.6% over the same time frame.
I think PH would be a compelling candidate under $185 per share, so, for now, I’m not really interested in opening a position.
Dividend Kings with Quality Scores of 15-19
This group of stocks is deemed High-Quality DG stocks. They fell short on up to five quality indicators and scored less than 4 points on one or more of the quality indicators.
I own one of these stocks Altria (MO), which is trading well below fair-value and also offers a compelling CDN of 17. I already own a full position of MO, otherwise adding to my position would have been prudent.
None of the other stocks look interesting to me, including Federal Realty Investment Trust (NYSE:FRT), a stock I previously owned. I decided to close my position in FRT in April 2019 as the REIT’s yield is on the low side and the dividend growth rate has slowed down in recent years.
Dividend Kings with Quality Scores below 15
The final group of stocks has quality scores below 15 points, with six in the Medium-Quality category and one in the Low-Quality category. There are no Dividend Kings in the Lowest Quality category.
I don’t own any of these stocks, although I previously owned Target (TGT). I closed my position in December 2017 to harvest tax losses. In hindsight, closing my TGT position was a poor move as the stock price shot up soon thereafter and I have yet to find a good re-entry point. On the other hand, now that I’m using quality scores to direct my investment choices, TGT no longer makes the grade.
Nordson (NDSN) has a compelling CDN, though the stock is trading at a significant premium to my fair value estimate. Furthermore, the puny yield of 0.92% is too low to seriously consider.
NDSN’s price line is above the primary valuation line and above the normal P/E ratio, so the stock is trading at a premium to fair value. An investment in NDSN in November 2009 would have returned 22.2% on an annualized basis (including dividends), whereas the S&P 500 returned only 12. 5% over the same time frame.
I might be interested in NDSN if the stock trades below $125 per share, but that’s substantially below the current stock price of $163 per share.
In my view, David Van Knapp’s quality scoring system does a remarkable job identifying high-quality DG stocks. The quality scoring system is quite stringent and stocks scoring 20-25 points would be considered high-quality stocks by many investors.
I modified the quality scoring system in order to rank DG stocks. This article ranked the 28 Dividend Kings, an elite group of stocks that have increased their dividend payouts for at least 50 consecutive years.
I’ve highlighted some stocks I find worthy of further consideration, especially those trading below fair value. Only MMM, LOW, and MO seem like good candidates at the present time. They offer compelling CDNs and are trading below fair value.
Of the 28 Dividend Kings, 15 are in the highest quality category with quality scores in the 20-25 range, 6 are high-quality stocks (15-19), while the remaining 7 stocks have quality scores below 15 points. The Dividend Kings include some truly high-quality stocks!
As always, though, I encourage readers to do their own due diligence before investing in any of the stocks I cover.
Source: Seeking Alpha: The 28 Dividend Kings Ranked By Quality Score