Baris-Ozer
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 dividend kings on the internet, some that include more than 48 companies. I have chosen to use the list provided by Suredividend.com that was updated on November 2, 2022 and includes three new dividend kings this month.
The three additions this month are: The Gorman-Rupp Company (GRC), Middlesex Water Company (MSEX) and V.F. Corporation (VFC).
The 48 companies on the dividend king list span 9 unique sectors, offer an average dividend yield of 2.63% and have an average 5-year dividend growth history of 6.86%. Even though all 48 of these companies share the status of an elite 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 my prior 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 from FinViz.com. 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 October 2022.
|
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 |
|
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% |
|||
|
GWW |
19.45% |
|||||||||||||||
|
HRL |
-1.81% |
-9.97% |
3.81% |
-2.17% |
17.90% |
|||||||||||
|
LEG |
1.60% |
|||||||||||||||
|
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% |
||
|
MMM |
-9.57% |
0.15% |
-3.13% |
|||||||||||||
|
MO |
-3.33% |
5.00% |
2.87% |
14.59% |
||||||||||||
|
MSA |
6.04% |
-5.04% |
6.00% |
-7.06% |
-8.06% |
22.84% |
||||||||||
|
NDSN |
-0.19% |
6.74% |
0.63% |
-8.90% |
-2.39% |
0.26% |
-5.02% |
-7.09% |
-6.56% |
6.00% |
||||||
|
NWN |
-0.91% |
-4.37% |
13.13% |
|||||||||||||
|
PH |
1.60% |
-4.60% |
1.01% |
-9.60% |
17.49% |
|||||||||||
|
PPG |
-9.42% |
-14.23% |
-1.78% |
-2.35% |
-0.71% |
-9.61% |
13.08% |
-1.31% |
-12.83% |
3.15% |
||||||
|
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% |
||
|
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% |
|
TGT |
-12.76% |
15.68% |
-1.27% |
-7.45% |
10.69% |
|||||||||||
|
TNC |
-3.24% |
-4.80% |
13.13% |
-9.60% |
-6.28% |
2.99% |
||||||||||
|
TR |
1.42% |
-3.85% |
||||||||||||||
|
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% |
|
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% |
|
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% |
Only 4 out of the 11 chosen dividend kings for October finished last month with a return better than the average dividend king universe return. The selected kings for October finished the month with a gain of 10.30%, underperforming the average dividend king universe return by 0.55%. The main drivers of underperformance were: Leggett & Platt (LEG) +1.60%, Tennant Company (TNC) +2.99% and PPG Industries (PPG) +3.15%. The best performing stock was Sysco (SYY) that returned 23.23% during the month. Strong returns were also achieved by MSA Safety Inc. (MSA) +22.84% and Grainger (GWW) +19.45%. This watchlist doesn’t beat the average dividend king universe return every month but in the long run it is still performing very well. A better measure for this strategy is with a buy-and-hold approach that is discussed later in this article.
11 Best Dividend Kings For November
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 11 dividend kings with the best expected future growth rates for November.
Created by Author
There is one change from the prior month, PPG Industries is replaced by The Gorman-Rupp Company. As a result the buy-and-hold portfolio will be expanded to 24 unique holdings after the month of November.
The Gorman-Rupp Company was up 14.08% in October but is still down 38.08% year-to-date.
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% |
|
Total |
0.49% |
0.16% |
0.33% |
|
2021 |
12.72% |
8.06% |
4.66% |
|
2022 |
-10.85% |
-7.32% |
-3.53% |
|
Cumulative |
0.49% |
0.16% |
0.33% |
|
Annualized |
0.39% |
0.13% |
0.27% |
The buy-and-hold portfolio for this strategy finished October with a gain of 12.00%. It outperformed both the average dividend king universe return and the October watchlist. As a result, the alpha generated by this strategy turned positive once more, shifting from -0.72% to +0.33% since July 2021. This portfolio performed very well in 2021 but is not doing so well as of late, Octobers results were a welcome sight.
The 4 largest positions in this portfolio made up 42.44% of the total market value at the start of October, their average return last month was a gain of 15.23% and was a major driver in the outperformance. The 4 largest holdings at the end of September, their allocation and October returns were:
- Sysco (SYY) 12.00%. +23.23%
- H.B. Fuller (FUL) 10.52%. +16.33%
- Lowe’s (LOW) 10.39%. +4.37%
- ABM Industries (ABM) 9.52%. +16.97%
Here is the current allocation of the buy-and-hold portfolio as of October 31, 2022. I’ve also included the September 30, 2022, allocation to show you how it has shifted as a result of contributions and market activity.
|
TICKER |
September |
October |
|
ABM |
9.52% |
9.23% |
|
ABT |
2.79% |
2.38% |
|
BDX |
1.82% |
1.60% |
|
CINF |
1.30% |
1.24% |
|
CWT |
3.42% |
3.34% |
|
FUL |
10.52% |
10.15% |
|
GWW |
0.00% |
0.69% |
|
HRL |
5.14% |
4.38% |
|
LEG |
0.00% |
0.59% |
|
LOW |
10.39% |
9.60% |
|
MMM |
2.11% |
1.99% |
|
MO |
2.30% |
2.85% |
|
MSA |
3.35% |
4.12% |
|
NDSN |
7.36% |
7.08% |
|
NWN |
2.89% |
2.68% |
|
PH |
3.72% |
3.70% |
|
PPG |
6.28% |
5.97% |
|
SJW |
0.90% |
0.91% |
|
SWK |
6.10% |
5.88% |
|
SYY |
12.00% |
12.98% |
|
TGT |
2.67% |
3.09% |
|
TNC |
3.40% |
3.50% |
|
TR |
2.03% |
2.05% |
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 2022
All 48 dividend kings are down 9.00% year-to-date through month-end October. 25 dividend kings are outpacing the dividend king universe of stocks this year and are driving the return. The remaining 23 dividend kings are all trailing the dividend king universe return.
Best 5 Dividend Kings in 2022:
- Genuine Parts Company (GPC) +29.36%
- Tootsie Roll (TR) +15.75%
- Grainger (GWW) +13.91%
- Sysco (SYY) +12.86%
- AbbVie (ABBV) +12.36%
Worst 5 Dividend Kings in 2022:
- V.F. Corporation (VFC) -60.20%
- Stanley Black & Decker (SWK) -57.50%
- The Gorman-Rupp Company (GRC) -38.08%
- PPG Industries (PPG) -32.89%
- Abbott Labs (ABT) -28.53%
Best 5 Dividend Kings in October:
- Sysco (SYY) +23.23%
- MSA Safety Incorporated (MSA) +22.84%
- SJW Group (SJW) +22.71%
- Tootsie Roll (TR) +21.69%
- Lancaster Company (LANC) +19.96%
Sysco and MSA, the top two dividend kings in October were part of my list from last month. In addition to these two kings, the buy-and-hold portfolio has a position in SJW and Tootsie Roll, the 3rd and 4th best kings in October.
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 well, but 16 months of data is a relatively short period of time. I look forward to seeing what this method has to offer in the future.
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