Dividend kings are an elite group of dividend stocks that have increased their payouts for at least 50 consecutive years. Very few businesses have even existed for 50 years, and fewer than 20 have had the reliable cash flows needed to pay out rising dividends that whole time.
Rising dividend payments are often a strong signal of financial health and profitability, which makes the dividend kings list a popular place for conservative income investors to hunt for ideas.
The companies on this list today collectively outperformed the market by more than 4 percentage points per year from 1990 through 2015, and they achieved their outperformance with significantly less price volatility.
So, that’s not just better returns — but peace of mind along the way.
While past performance is not necessarily indicative of future results, dividend kings are blue-chip dividend stocks that possess many long-lasting strengths. Most of these businesses generate consistent free cash flow, operate in slow-changing industries, play critical roles in the economy and dominate their markets.
If you’re planning for retirement, investing in dividend stocks like these can provide exposure to reliable, ever-increasing amounts of regular income, all while facing less risk during bear markets. The current list of dividend kings dropped by an average of 17% in 2008 — less than half the S&P 500’s 37% plunge!
Today, we’ll look at five dividend kings that have some of the highest yields in the group, while still offering safe payouts. (Note: We own most of these dividend stocks in our Top 20 Dividend Stocks portfolio and our Conservative Retirees portfolio.)
Without further ado …
Dividend Stocks for Retirement: Emerson Electric Co. (EMR)
Dividend Yield: 3.9%
Emerson Electric (EMR) was founded in 1890 and is one of the oldest dividend aristocrats. The company has grown into a diversified manufacturer of industrial products ranging from valves and compressors to server enclosures and software.
Emerson is in the middle of selling off some non-core assets to refocus on its more profitable businesses. When all is said and done, EMR will retain businesses focused on selling equipment that controls industrial processes and components used in heating and air conditioning systems.
Emerson Electric’s main competitive advantages are its focus on profitable niches and reputation for quality. Many of EMR’s solutions are a small proportion of the end product’s total cost, but they must function correctly all of the time for the end product to be useful. Customers trust Emerson Electric for its proven reliability and are happy to pay up to keep their operations running smoothly. Over time, these strong customer relationships have snowballed to form a massive installed base of equipment from the company, which results in a long stream of stable aftermarket business.
The dividend on EMR stock has grown 36% over the past five fiscal years, including a hefty 9.3% bump in late 2014. Investors will be more likely to see the smaller bumps of 2015 and 2013, however, as weakness in energy and manufacturing markets are likely to slow the company’s dividend growth rate over the near-term.
Still, Emerson’s 63% earnings payout ratio still supports a healthy dividend outlook.
A rough 2015 helped drive up the yield on EMR to nearly 4%, which is much higher than its 3.3% five-year average yield, and driven down its forward price-to-earnings ratio to about 15.
Emerson shares look relatively cheap for investors willing to wait out macro softness that is impacting the company today.
Dividend Stocks for Retirement: Procter & Gamble (PG)
Dividend Yield: 3.2%
Procter & Gamble (PG) is one of the most popular dividend stocks among retirement investors due to its well-known consumer brands and business stability. The company sells a wide range of branded consumer products, from Oral-B dental products to Downy fabric softener to Olay beauty products.
Procter & Gamble’s products are simply staples — no matter how broke you are, you can’t go without toilet paper and toothpaste. And those products have maintained dominant market share positions thanks to the company’s high spending on research and development ($2 billion annually) and advertising (over $8 billion annually). The company is in the process of divesting some brands to focus on its strongest 10 categories, which should drive more profitable growth going forward.
Management has grown the company’s dividend by nearly 10% per year for the past decade, though that pace has decelerated into the mid-single digits more recently. Still, with a payout ratio of roughly 60% and reliable free cash flow generation, Procter & Gamble’s dividend is plenty safe and should continue to increase for many years to come.
PG stock isn’t cheap at nearly 23 times forward earnings estimates, and its current yield of 3.2% is more in line with its five-year average. Still, it’s hard to find more reliable companies than Procter & Gamble, making a small premium worth it.
Dividend Stocks for Retirement: Cincinnati Financial Corporation (CINF)
Dividend Yield: 3.1%
Cincinnati Financial (CINF) is one of the 25 largest property casualty insurers in the United States and traces its roots back to 1950.
CINF makes money from writing insurance policies, which often break even or even generate a small loss, and investing proceeds into stocks and bonds that generate income before claims need to be paid out. Most of the company’s premiums are written for commercial businesses (67% of premiums in 2014), but personal policies are also important (25%).
Insurance companies only survive as long as Cincinnati Financial has if they conservatively manage risk. All it takes are a few catastrophes and some poorly priced insurance policies to pull an insurer under. CINF has generated 26 years of favorable reserve developments, which occur when a company conservatively books more losses than it actually realizes in any given year. The company’s conservatism is also reflected in its strong balance sheet, which holds roughly $545 million in cash compared to debt of roughly $820 million.
The company’s dividend growth has hovered in the low to mid-single digits during the past five years, and the company most recently hiked its dividend by 4.3% in late January. We expect a 2% to 4% annual dividend increase going forward, reflecting the mature state of the insurance market.
CINF’s stock trades at 21 times forward earnings estimates and has a dividend yield of 3.1%, which is meaningfully lower than its 3.8% five-year average yield. This is a stock to keep an eye on for now and buy on dips.
Dividend Stocks for Retirement: Johnson & Johnson (JNJ)
Dividend Yield: 2.9%
Johnson & Johnson (JNJ) is a pre-eminent healthcare company with more than $70 billion in annual sales. Most of the company’s profits are driven by its pharmaceuticals business, but it also has meaningful businesses in medical devices and consumer products such as baby care.
Essentially, Johnson & Johnson is one of the biggest and most diversified companies in healthcare.
JNJ only invests in markets that it can dominate, which has helped the business attain No. 1 and No. 2 market share positions for approximately 70% of its total sales. The company also invests more than $8 billion in research and development each year to stay relevant, and it claims that about 25% of its revenue is from products that it launched over the last five years. Continuous innovation and diversified sources of cash flow make J&J hard to disrupt.
Johnson & Johnson’s dividend has compounded at an annual rate of 8.8% over the last decade, and the company’s most recent dividend increase was 7.1% in early 2015. Here, we can expect more robust dividend growth, as JNJ has some $37 billion in cash on hand, not to mention a payout ratio below 60%.
Valuation for JNJ shares is right up the middle at about 16 times estimates for next year’s earnings, and a dividend yield of 2.9% that is just a hair under its five-year average. And don’t discount the possibility for M&A — Johnson & Johnson has enough of a cash hoard to make a transformative acquisition if it wants.
Dividend Stocks for Retirement: Genuine Parts Company (GPC)
Dividend Yield: 2.9%
Genuine Parts (GPC) sells a wide range of automotive replacement parts (over 450,000 products), industrial replacement parts, office products and electronic materials. Most of its business is from the automotive market (53% of sales), followed by industrial applications (31%). Furthermore, over 90% of Genuine Parts’ business is conducted in North America, which has helped shield it a bit from the stronger U.S. dollar over the last year.
Few businesses are more reliable than Genuine Parts. When a car or piece of machinery breaks down, it needs to fixed. The company has the largest auto parts network in the country and is able to offer 24/7/365 delivery, making it an obvious vendor of choice. As a result of its distribution network, product breadth and reputation for quality, Genuine Parts has No. 1 or No. 2 market share positions in each of its segments.
Even as far as dividend stocks go, GPC is a bastion of consistency. Genuine Parts has religiously grown its dividend by roughly 7% per year almost every year during the past decade, including another 7% raise earlier this month. With an extremely large and fragmented market to continue growing in and an earnings payout ratio of about 50%, we expect mid- to upper-single digit dividend increases to continue.
Genuine Parts’ stock trades at 19 times forward earnings estimates, and at 2.9% is yielding slightly higher than its five-year average. We like GPC at current prices, and recommend it to all dividend growth investors.
As of this writing, Simply Safe Dividends was long CINF, EMR, GPC, JNJ and PG.