Let Dividend King Stocks Take You To The Promised Land | personal finance

(Stefon Walters)

A complete investment portfolio should include companies that pay dividends. As a shareholder, dividends are a way of being rewarded for holding your investments and, when used correctly, can account for a good portion of your total portfolio return. However, not all companies that pay dividends are created equal. If you’re looking for consistent, well-established companies, look no further than Dividend Kings.

Here’s why you should let them take you to the promised land.

Image source: Getty Images.

They have stood the test of time

Dividend Kings earned their honorary title because they managed to increase their annual dividend for at least 50 years in a row. Being able to maintain a dividend for so long is an achievement in itself, but being able to increase it for so many years is an entirely different feat. With Dividend Kings, you know you’re investing in companies that have stood the test of time.

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Any company with the title of Dividend King in 2022 has increased its dividend since 1972, at the earliest. During that time, these companies have survived some of the most difficult economic conditions the United States has seen. Dividend Kings have achieved this through:

  • Black Monday (1987).
  • Collapse of the dotcom bubble (2000).
  • The Great Recession/Financial Crisis (2008-2009).
  • COVID-19 pandemic (2020).

There are plenty of strong companies that had to cut their dividends during those times, including prominent Fortune 500 companies, but Dividend Kings stood their ground and weathered the storm.

There is power in the DRIP

While receiving dividends can be a great source of income, the real power comes when you enroll in your brokerage’s Dividend Reinvestment Program (DRIP). With DRIP, any dividends you receive are automatically used to buy more shares of whatever company or fund paid them. This adds to the power of compound interest.

Let’s say we have two funds, one with no dividends and one with a 2.5% dividend yield, and you contributed $500 to both monthly, receiving a 10% annual return (the historical average for the S&P 500). Assuming the dividend yield stays the same, here’s what the account totals might look like in 25 years:

Background Dividend yield Amount Contributed in 25 Years Total account after 25 years
Background 1 0% $150,000 $590,000
background 2 2.5% $150,000 $864,000

Data source: Author’s calculations

With no extra effort, receiving (and reinvesting) dividends increased his account total by approximately $274,000. As a dividend investor, it helps to delay receiving cash payments until retirement, when having an additional source of income may be more beneficial. Until then, you can get great rewards using a DRIP. Even if you manage to accumulate $500,000 in a fund with a 2.5% return, that’s $12,500 in annual payments.

More importantly, it helps to invest in Dividend Kings because you can, in good faith, not only trust the dividend but also anticipate that it will rise. Your dividend payout increases, your number of shares increases, and you receive higher payouts; it’s a cycle you want to get stuck in.

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