Dec 1, 2023
Dividends can serve as a key source of passive income, and when it comes to consistently delivering this income to shareholders, a select group of companies stands apart: the "dividend kings."
The "dividend kings" are publicly traded companies that have increased their dividend payouts to shareholders for at least 50 consecutive years. This is an extraordinary feat, especially when one considers the myriad of events that can transpire over half a century, such as economic booms and busts, technological revolutions, and major shifts in global market trends.
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Despite these challenges, "dividend kings" have thrived, delivering bigger dividend checks to shareholders every single year. This impressive record is a clear indicator of a strong and stable business, often marked with a durable competitive advantage in its industry.
Warren Buffett, an investing legend who values these competitive advantages and calls them "economic moats," famously said that his favorite holding period is forever — a philosophy that aligns well with investing in companies that consistently increase their dividends. However, this doesn’t mean he’s not going to sell any of the stocks in his portfolio.
In fact, Buffett’s company Berkshire Hathaway (BRK.B) sold $7 billion worth of equities while buying only $1.7 billion in Q3 2023 — meaning it was a net seller of about $5.3 billion worth of stocks.
Among the stocks Buffett sold during the quarter were two renowned "dividend kings." While it may be tempting to follow the Oracle of Omaha, keep in mind that each investor’s financial circumstances are unique — and Wall Street still sees upside in this duo.
Here’s a closer look at the two companies in question.
Johnson & Johnson
With deeply entrenched positions in consumer health, pharmaceuticals and medical devices markets, healthcare giant Johnson & Johnson (JNJ) has delivered consistent returns to investors throughout economic cycles.
Many of the company’s consumer health brands — such as Tylenol, Band-Aid, and Listerine — are household names. In total, JNJ has 29 products each capable of generating over $1 billion in annual sales, according to its 2022 Investor Fact Sheet.
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Not only does Johnson & Johnson post recurring annual profits, but it also grows them consistently: Over the past 20 years, the company's adjusted earnings have increased at an average annual rate of 8%.
The stock has trended up for decades, all while returning an increasing amount of cash to shareholders. JNJ announced its 61st consecutive annual dividend increase in April and now yields 3.1%.
According to Berkshire’s latest 13F filing to the SEC, it offloaded its entire investment in JNJ in Q3 of 2023.
JNJ shares have fallen over 11% year to date, but Raymond James analyst Jayson Bedford sees a rebound on the horizon. The analyst has an “outperform” rating on JNJ and a price target of $172, implying a potential upside of about 9%.
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Procter & Gamble
Berkshire also sold off its entire stake in Procter & Gamble (PG) in Q3 — a company with an even longer dividend growth track record than JNJ.
P&G announced a 3% dividend increase in April 2023, marking its 67th consecutive annual payout increase. The stock currently offers an annual dividend yield of 2.5%.
It’s easy to see why the company is able to maintain such a streak.
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P&G is a consumer staples giant with a portfolio of trusted brands like Bounty paper towels, Crest toothpaste, Gillette razor blades, and Tide detergent. These are products that households buy on a regular basis, regardless of what the economy is doing.
While shares have risen by less than 1% in 2023, they are up 65% over the last five years, and JPMorgan analyst Andrea Teixeira sees further upside on the horizon. The analyst has an “overweight” rating on P&G and a price target of $169 — around 11% above where the stock sits today.
Still a dividend junkie
Despite selling off these two dividend giants, Buffett still reaps substantial income from his portfolio’s other holdings. In fact, all of Berkshire’s top five publicly traded holdings as of Sept. 30 had a dividend policy.
Notably, his fourth-largest holding was Coca-Cola (KO) at the end of Q3. Coca-Cola is another Dividend King — the company has increased its payout to shareholders for 61 years straight.
Buffett has claimed he drinks five cans of Coke daily. Berkshire has held Coca-Cola in its portfolio since the late ’80s and it continues to collect dividends from the investment.
And the amount might surprise you.
Coca-Cola is on track to pay four quarterly dividends totaling $1.84 per share in 2023. Considering that Berkshire owns 400 million shares of Coca-Cola, it’s on track to collect $736 million in dividends from the beverage giant this year.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
