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Dividend Kings versus S&P 500

There are investors like me who believe that investing in companies with consistently growing dividends will lead to good performance. Collectively, we are known as Dividend Growth Investors or ‘DGI’ for short. But there are others who argue that investing in an index fund or index ETF such as the S&P 500 (SPX) is simply better and easier. Arguably, most index funds have very low costs and one does not have to do any trading. But with that said, costs for stock investing is now low since many brokerages no longer charge commissions. So, now it is really a matter of comparing performance. In this article I compare the performance of the Dividend Kings versus the S&P 500 over the past 20-years. This time period covers two major recessions and two major bull markets. It also lets one compare said dividend growing companies that in many cases have been around for decades versus a tech-heavy index fund.

Dividend Kings

The Dividend Kings are a well-known group of stocks that have raised the dividend for 50+ consecutive years. This is a fairly select list as only 28 companies have successfully done so. This is out of the over 4,000 companies listed on stock exchanges at end of 2018. These companies have survived periods of inflation, stock market crashes, global crisis and deep recessions. They may not have grown revenue and earnings per share every year, but they annually raised the dividend without fail.

The company with the longest track record of growing the dividend is American States Water NYSE:AWR with 65 years of straight increases. In fact, there were four water utilities on the list at the start of 2019. The number decreased by one as Connecticut Water Service NYSE:CTWS was acquired by SJW Group NYSE:SJW. The newest entries are Altria Group Inc NYSE:MO and Sysco Corporation NYSE:SYY both which reached 50 years of dividend growth late this year. There are currently no master limited partnerships (MLPs) on the list. There is only one real estate investment trust (REIT) on the list, Federal Realty Investment Trust NYSE:FRT.

The average payout ratio is about 55% to 60% but there are a few companies that have high payout ratios over 65%. Interestingly, the list is not dominated by large cap companies but includes quite a few mid-cap ($2B – $10B) and small cap companies ($300M – $2B). The largest Dividend King by market capitalization is Johnson & Johnson NYSE:JNJ.

TickerCompanySectorIndustry
AWRAmerican States Water CompanyUtilitiesUtilities – Regulated
DOVDover CorporationIndustrialsIndustrial Products
GPCGenuine Parts CompanyConsumer CyclicalRetail – Cyclical
NWNNorthwest Natural Holding CompanyUtilitiesUtilities – Regulated
PGProcter & Gamble CompanyConsumer DefensiveConsumer Packaged Goods
PHParker-Hannifin CorporationIndustrialsIndustrial Products
EMREmerson Electric CompanyIndustrialsIndustrial Products
MMM3M CompanyIndustrialsIndustrial Products
CINFCincinnati Financial CorporationFinancial ServicesInsurance
JNJJohnson & JohnsonHealthcareDrug Manufacturers
KOCoca-Cola CompanyConsumer DefensiveBeverages – Non-Alcoholic
CLColgate-Palmolive CompanyConsumer DefensiveConsumer Packaged Goods
FMCBFarmers & Merchants BancorpFinancial ServicesBanks
LANCLancaster Colony CorporationConsumer DefensiveConsumer Packaged Goods
LOWLowe’s Companies Inc.Consumer CyclicalRetail – Cyclical
NDSNNordson CorporationIndustrialsIndustrial Products
HRLHormel Foods CorporationConsumer DefensiveConsumer Packaged Goods
ABMABM Industries IncorporatedIndustrialsBusiness Services
CWTCalifornia Water Service GroupUtilitiesUtilities – Regulated
SJWSJW GroupUtilitiesUtilities – Regulated
TRTootsie Roll Industries Inc.Consumer DefensiveConsumer Packaged Goods
CBSHCommerce Bancshares Inc.Financial ServicesBanks
FRTFederal Realty Investment TrustReal EstateREITs
SCLStepan CompanyBasic MaterialsChemicals
SWKStanley Black & Decker Inc.IndustrialsIndustrial Products
FULH. B. Fuller CompanyBasic MaterialsChemicals

S&P 500

The S&P 500 is a stock market index launched in 1957 consisting primarily of large-cap U.S. equities. Today, the index covers about 80% of the available U.S. market capitalization and is comprised of 505 companies. The largest companies in the index tend to be information technology companies followed by financial companies and health care companies. In fact, about 23% of the index is comprised of IT companies, 14% health care, and 13% financials. The largest company by market capitalization is Microsoft Corporation NASDAQ:MSFT. A list of the constituents by weighting is found here. The index is widely followed, and many investors own the index as part of their retirement plans.

Source: S&P 500

Performance Comparison: Dividend Kings versus S&P 500

For this performance comparison, we look at $3,000 invested initially in the Dividend Kings or an S&P 500 index fund. We assume that all dividends are reinvested. We make the comparison for 20-years with a start point in 1999. Some comparisons use an initial sum but forgo subsequent annual contributions. This is probably not realistic as most investors would continue to invest each year. Hence, we assume that the investor makes an annual investment of $3,000 after the initial one that is adjusted for inflation. We make the comparison using the Portfolio Visualizer website.

Over the trailing 20-years the performance difference is dramatic. Portfolio 1, which consists of the 29 Dividend Kings has a CAGR of ~24.7%, whereas the S&P 500 has a CAGR of ~22.9%. Although this seems small, it results in large differences in the final balance after 20-years and in the annualized rate of returns. When investing in the Dividend Kings an investor ends up with $302,271 and when investing in the S&P 500 the same investor ends up with $224,365 after 20-years. The internal rate of return is ~11.6% for the Dividend Kings and only ~9.2% for the S&P 500.

Comparison of Portfolio Growth

Source: Portfolio Visualizer

There are three primary reasons that the Dividend Kings outperform the S&P 500. First, the Dividend Kings experienced a lower number of years with negative returns. The time span encompasses two major bear markets: 30 months from 2000 to 2002 and 17 months from 2007 to 2009. These were major bear markets and the Dividend Kings only had two down years compared to four down years for the S&P 500. The second reason is that the worst year for the Dividend Kings was only (17.62%) while the worst year for the S&P 500 was a whopping (36.81%) or more than double that of the Dividend Kings. The S&P 500 could not make this up on in the best year. The index’s best year was 32.31% whereas that of the Dividend Kings was 27.56%. The third reason is that the Dividend Kings outperformed the S&P 500 in 12 out of 20 years. These are all significant hurdle to overcome for the S&P 500 when compared to the Dividend Kings.

Comparison of Annual Returns

Source: Portfolio Visualizer

The Dividend Kings also experienced lower volatility than the S&P 500 during the trailing 20-years. The standard deviation of returns of was 12.5% versus ~14.4% for the S&P 500. The combination of higher rates of return and lower standard deviation result in higher Sharpe ratio of 0.74 for the Dividend Kings versus 0.39 for the S&P 500 (based on monthly returns and 1-month U.S. Treasury bill). This indicates that the Dividend Kings have high risk-adjusted performance compared to the S&P 500.

Final Thoughts On The Dividend Kings vs. S&P 500

In the past 20-years the Dividend Kings have been a good investment for those focused on dividend growth. There is no guarantee that they will be good investments in the next 20-years. But the long-term performance and stability of these companies has been demonstrated through time. Through a combination of strong businesses and sound capital allocation decisions the Dividend Kings have provided good returns to investors with less volatility. It is for these reasons that I focus on DGI and will continue to do so.

This article was first posted on the Dividend Earner blog on December 16, 2019.


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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