Dividend Kings vs the S&P 500 Index

Dividend Earner

Dividend Earner

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6 min read Affiliate Disclosure

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, such as Questrade, 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 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 was acquired by SJW Group . The newest entries are Altria Group Inc and Sysco Corporation 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.

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.

wdt_ID Ticker Company Sector Industry
1 AWR American States Water Company Utilities Utilities - Regulated
2 DOV Dover Corporation Industrials Industrial Products
3 GPC Genuine Parts Company Consumer Cyclical Retail - Cyclical
4 NWN Northwest Natural Holding Company Utilities Utilities - Regulated
5 PG Procter & Gamble Company Consumer Defensive Consumer Packaged Goods
6 PH Parker-Hannifin Corporation Industrials Industrial Products
7 EMR Emerson Electric Company Industrials Industrial Products
8 MMM 3M Company Industrials Industrial Products
9 CINF Cincinnati Financial Corporation Financial Services Insurance
10 JNJ Johnson & Johnson Healthcare Drug Manufacturers
11 KO Coca-Cola Company Consumer Defensive Beverages - Non-Alcoholic
12 CL Colgate-Palmolive Company Consumer Defensive Consumer Packaged Goods
13 FMCB Farmers & Merchants Bancorp Financial Services Banks
14 LANC Lancaster Colony Corporation Consumer Defensive Consumer Packaged Goods
15 LOW Lowe's Companies Inc. Consumer Cyclical Retail - Cyclical
16 NDSN Nordson Corporation Industrials Industrial Products
17 HRL Hormel Foods Corporation Consumer Defensive Consumer Packaged Goods
18 ABM ABM Industries Incorporated Industrials Business Services
19 CWT California Water Service Group Utilities Utilities - Regulated
20 SJW SJW Group Utilities Utilities - Regulated
21 TR Tootsie Roll Industries Inc. Consumer Defensive Consumer Packaged Goods
22 CBSH Commerce Bancshares Inc. Financial Services Banks
23 FRT Federal Realty Investment Trust Real Estate REITs
24 SCL Stepan Company Basic Materials Chemicals
25 SWK Stanley Black & Decker Inc. Industrials Industrial Products
26 FUL H. B. Fuller Company Basic Materials Chemicals

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. 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.

S&P 500 Sector Breakdown
Source: S&P 500

Performance Comparison

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

Growth of Dividend Kings v SP 500
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

Annual Returns of Dividend Kings v SP 500
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.