Dividend King Trading Strategy Analysis (Backtest And Performance)

ByOddmund Groette Dividend Investing

While some investors focus on capital appreciation, others are more interested in stocks that consistently pay dividends. These consistent dividend-paying stocks are grouped into categories and given some cool names, such as Dividend Aristocrats and Dividend Kings. Our interest here is in the latter. What is the Dividend King trading strategy?

A Dividend King trading strategy is a stock investment strategy that focuses on investing in companies that have a long history of consistently increasing their dividend payouts to shareholders.

Dividend Kings are companies that have reached at least 50 consecutive years of dividend increases.

In this post, we answer some questions about the Dividend King trading strategy. At the end of the article, we backtest the strategy. If you want more profitable investment strategies, you might want to check out that clickable link.

What is a Dividend King Trading Strategy?

A Dividend King trading strategy is a stock investment strategy that focuses on investing in companies that have a long history of consistently increasing their dividend payouts to shareholders.

These companies are often considered to be financially stable and reliable, and they may be less risky investments than other stocks because they have a “proven” business model and might have what Warren Buffett calls a “moat”. Morningstar’s Wide Moat Index has outperformed S&P 500 over the last two decades.

The Dividend King strategy involves identifying these companies, researching their financials, and then investing in them with the expectation that their dividends will continue to grow over time. The goal is to generate a steady stream of income from the dividends, while also potentially benefiting from capital appreciation of the stock.

Unlike Dividend Aristocrats, Dividend Kings don’t have to be members of the S&P 500, but they must reach at least 50 consecutive years of payout growth. These companies have demonstrated a commitment to returning value to shareholders through dividends, which can be a positive sign for their health and stability.

The Dividend King strategy is that it can provide a way to generate income in a portfolio while also potentially reducing overall portfolio risk. By investing in companies with a history of consistent dividend growth, investors can potentially enjoy a steady stream of income without having to rely on volatile capital gains. Bear market dividend growth investing proves that dividends are less volatile than share prices and fall less than the share price in a bear market. Also, Dividend Aristocrats have proven to be more recession proof than the market.

Note that the Dividend King strategy is not a one-size-fits-all and it requires research and due diligence to identify the companies with a strong history of increasing dividends, a strong financial position, and a sustainable business model. It’s also important to diversify the portfolio and not put all eggs in one basket. There are no easy ways to success.

What are the Benefits of Dividend Kings Trading?

There are many benefits to using a Dividend King trading strategy:

  • Consistent income: Dividend Kings are companies that have a long history of consistently increasing their dividend payouts, which can provide a steady stream of income for investors. However, dividends are not really income – it’s capital distribution. Please read here for why selling shares is the same as receiving a dividend.
  • Financial stability: Companies that have a strong track record of increasing dividends are often financially stable and reliable, which can make them less risky investments. Most of them have a “proven” business model.
  • Capital appreciation: Investing in companies with a history of consistent dividend growth can also potentially lead to capital appreciation of the stock over time.
  • Reduced portfolio risk: By investing in companies with a history of consistent dividend growth, investors can potentially reduce overall portfolio risk while still generating income.
  • Diversification: Dividend Kings are often from different industries and sectors, so investing in a basket of Dividend Kings can provide diversification in the portfolio.

How to Select Dividend Kings?

These are some of the factors to consider when selecting Dividend Kings:

  • Dividend History: Look for companies that have a long track record of consistently increasing their dividends.
  • Financial Stability: Investigate the company’s financials to ensure that it has a strong balance sheet and is in a financially stable position. Debt is like poison in a bear market when the price of money goes up.
  • Dividend Yield: Look for companies with medium dividend yield, but it’s important to also consider the sustainability of the dividend payouts. The fact is that a good dividend yield is neither high nor low.
  • Earnings and Cash Flow: Make sure the company has consistent earnings and cash flow to support its dividends.
  • Growth prospects: Evaluate the company’s growth prospects and its ability to continue growing its dividends in the future.

What are the Best Practices for Dividend Kings Trading?

Here are some best practices for implementing a Dividend King trading strategy:

  • Conduct thorough research and due diligence on each potential Dividend King before making an investment. We believe looking at the debt ratio is paramount. Make sure there is a margin of safety.
  • To reduce portfolio risk, diversify your portfolio by investing in a basket of Dividend Kings from different industries and sectors. How many dividend stocks should you own?
  • Consider the long-term prospects of the company when making investment decisions. Nothing lasts forever. Kodak went bankrupt.
  • Keep an eye on the fundamentals to make sure that the company is still in a strong financial position and able to continue increasing dividends
  • Monitor the economy and the market trends and make adjustments to your portfolio as necessary to protect your investments
  • Have a trading plan in place for when to buy, hold, and sell the stocks
  • Be prepared to hold the stock for a while to benefit from the growing dividends and potential capital appreciation
  • Consider the tax implication of your investments, as dividend income is generally taxed at a higher rate than capital gains

What are the Risks of Dividend Kings Trading?

Dividend Kings trading can come with the following risks:

  • Company risks: The companies can have financial issues and stop or suspend dividend payments, or even go bankrupt and fold up
  • Economic risks: Economic downturns or recessions can negatively impact the overall market and individual companies’ profitability, which can in turn lead to a reduction or suspension of dividends
  • Interest Rate Risks: Rising interest rates can make bonds more attractive to investors, leading to a decrease in demand for dividend-paying stocks and potentially leading to a decrease in stock prices
  • Growth risks: Dividend Kings are often mature companies with limited growth prospects, so they may not have much room to grow and may be overvalued, which can increase the risk of future dividend cuts.
  • Tax Risks: Dividend income is generally taxed at a higher rate than capital gains, so investors need to keep an eye on the tax implications of their investments.

How to Manage Risk when Trading Dividend Kings?

These are some things you can do to manage risk when trading Dividend Kings:

  • Have a diversified portfolio.
  • Conduct proper research and due diligence before investing in any company.
  • Keep an eye on the companies’ fundamentals to be sure that they are still in a strong financial position and able to continue increasing dividends.
  • Monitor the economy and the market trends
  • Have a risk management plan, including position sizing and stop loss strategies.
  • Have realistic expectations so you don’t get disappointed
  • Keep an eye on taxes.Top of Form

What are the Strategies to Maximize Returns with Dividend Kings?

Here are some strategies to maximize returns with Dividend Kings:

  • Reinvesting your dividends back into the stock so as to compound the growth of your investment over time. However, reinvestment is normally after taxes.
  • Using dollar-cost averaging to smooth out the effects of market volatility and lower the average cost per share over time
  • Investing in a basket of Dividend Kings to maintain a diversified portfolio.
  • Having a long-term focus
  • Keeping an eye on the fundamentals of all the companies in your portfolio to know when to dump shaky companies
  • Keeping an eye on the economy and the market trends to know when to make adjustments to your portfolio as necessary to protect your investments
  • Having a plan in place for when to buy, hold, and sell the stocks
  • Using a tax-advantaged account

How to Create an Effective Dividend Kings Portfolio?

Here is how to create an effective Dividend Kings portfolio:

  • Research every company you want to invest in, evaluating the company’s financials, dividend history, growth prospects, and industry trends.
  • Diversify your portfolio by investing in a basket of Dividend Kings from different industries and sectors.
  • Have a good proportion of small-cap and mid-cap companies in your portfolio, as they may offer higher growth potential, but they also come with higher risk.
  • Set a target allocation for each stock in the portfolio, and make sure to keep your portfolio balanced, and not over-concentrated in a single stock or sector.
  • Rebalance your portfolio periodically to make sure it still aligns with your investment goals and risk tolerance.
  • Keep an eye on the fundamentals of all the companies in your portfolio to know when to dump shaky companies
  • Keep an eye on the economy and the market trends to know when to make adjustments to your portfolio as necessary to protect your investments

What is the Best Time to Buy Dividend Kings?

There is no definitive best time to buy Dividend Kings, as the timing of an investment will depend on various factors such as the company’s financial performance, market conditions, and the investor’s goals and risk tolerance. However, here are a few general guidelines to keep in mind when considering when to buy Dividend Kings:

  • Buy when the stock is trading at a discount
  • Consider buying when the overall market is in a bearish phase, as Dividend Kings may tend to be less volatile and can provide a stable income
  • Buy when the company’s fundamentals are strong
  • You can use dollar-cost averaging to avoid timing the market and also smooth out the effects of market volatility

Which Dividend Kings Offer the Highest Yields?

Dividend yield is the annual dividend per share divided by the stock’s price per share. The highest yields can change often and depend on the stock prices and dividends at a specific point in time.

These are some Dividend Kings that have historically offered high yields include:

  • Procter & Gamble (PG): Procter & Gamble is a consumer goods company that has a long history of increasing dividends and has been consistently paying dividends for over 60 years. Its yield is around 2.5%.
  • Johnson & Johnson (JNJ): Johnson & Johnson is a healthcare company that has a long history of increasing dividends and has been consistently paying dividends for over 55 years. Its yield is around 2.5%.
  • AT&T (T): AT&T is a telecommunications giant that has a long history of increasing dividends and has been consistently paying dividends for over 30 years. Its yield is around 6%. However, the price you pay in AT&T is mediocre capital appreciation.

Note that some companies may be offering high yields but they may not be sustainable in the long run and their dividends may not be safe.

What are the Tax Implications of Dividend Kings Trading?

The tax implications of Dividend Kings trading can vary depending on the investor’s country of residence and the type of investment vehicle used. In general, dividends are taxed at a different rate than capital gains.

In the United States, dividends are generally taxed as ordinary income, which means they may be subject to higher tax rates than capital gains. Consult with your tax adviser to know what applies to your situation.

Dividends are tax inefficient. Taxes make you reinvest less and thus less for compounding.

What are the Most Popular Dividend King Trading Strategies?

Some of the most popular strategies include:

  • Dividend Reinvestment Plan (DRIP) — allows investors to automatically reinvest dividends back into the stock, which can compound the growth of their investment over time.
  • Dividend Growth Investing — focuses on investing in companies with a long history of consistently increasing dividends
  • Dividend Income — focuses on companies that offer high yields and pay consistent dividends, with the goal of generating a steady stream of income in the short term.
  • Dividend Value Investing — focuses on investing in companies that are undervalued and have a

What are the Pros and Cons of Dividend Kings Trading?

Dividend Kings trading can come with some potential advantages and disadvantages.

Pros:

  • Consistent income
  • Less return volatility
  • Potential for capital appreciation
  • Lower risk

Cons:

  • Limited growth potential
  • Tax implications
  • Dependence on dividends
  • Dividends not guaranteed
  • Potential for dividend cuts

How to Monitor and Adjust Your Dividend Kings Portfolio?

Monitoring and adjusting your Dividend Kings portfolio is an important part of managing risk and maximizing returns. Here are some ways you can monitor and adjust your portfolio:

  • Regularly review your portfolio
  • Keep an eye on the fundamentals to be sure that the company is still in a strong financial position and able to continue increasing dividends
  • Monitor the economy and the market trends
  • Rebalance your portfolio periodically to make sure it still aligns with your investment goals and risk tolerance — sell underperformers and reallocate the funds to other companies that are in a stronger position
  • Have a plan in place for when to buy, hold, and sell the stocks

What are the Latest Trends in Dividend Kings Trading?

Some of the latest trends in Dividend Kings trading include:

  1. ESG (Environmental, Social, Governance) investing — focusing on companies with sustainable practices, diversity, and responsible corporate governance
  2. Tech dominance — Technology companies are getting into the Dividend Kings category
  3. Dividend ETFs and Mutual Funds — another way for investors to have a diversified portfolio of Dividend Kings

Dividends King ETF

Currently, there are no ETFs that specifically tracks Dividend Kings. However, the ETF with the ticker code NOBL tracks Dividend Aristocrats, and all Dividend Kings are in that index (but also others, of course).

International dividend stocks

If you are into dividend investing, you might be interested in our other articles about the best dividend stocks in other markets:

Dividend King strategy backtest and performance- Does It Work

As of writing, there are 48 Dividend Kings. To our knowledge, there isn’t any research that specifically looks at the performance and returns for the Dividend Kings. As a proxy for that, we look a Dividend Aristocrats.

We downloaded data from yahoo!finance and compared dividend aristocrats to S&P 500. We used the ETF with the ticker code NOBL and compared it to the ETF that tracks S&P 500 (SPY). Dividends are reinvested and this is what the performance looks like:

Dividend King strategy backtest and performance

We started with 10 000 invested in 2013 and as you can see, S&P 500 has performed better during this period. However, you can also notice that during weak markets NOBL is more resilient and falls less.

We believe that even a ten-year period is too short to make any conclusions. But if you are a long-term investor, we believe the best approach is not to stick to a certain investment strategy but invest for diversification.

FAQ

How does the Dividend King strategy differ from Dividend Aristocrats?

Dividend Kings are companies that have increased dividends for at least 50 consecutive years, whereas Dividend Aristocrats have a track record of increasing dividends for at least 25 consecutive years and are typically S&P 500 members.

How do you select Dividend Kings?

Factors to consider include dividend history, financial stability, dividend yield sustainability, earnings and cash flow consistency, and growth prospects of the company.

What are the risks of Dividend Kings Trading?

Risks include company-specific risks such as financial issues or bankruptcy, economic risks such as downturns impacting profitability, interest rate risks, growth risks due to limited growth prospects, and tax implications of dividend income.

How to create an effective Dividend Kings portfolio?

Steps include researching companies, diversifying across industries and sectors, setting target allocations, rebalancing periodically, monitoring fundamentals and market trends, and considering the economy’s impact.

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