Unlike the NFL or NBA, where we can only crown one champion, plenty of stocks can own the title of "Dividend Champion" as long as they meet specific criteria. And no, they won't fight each other unless you consider competition for investment dollars.
Dividend Champions can be a portfolio cornerstone for investors, especially those approaching retirement age who want a little security (and income) from their holdings. In this article, you'll learn what makes a stock a Dividend Champion, what separates Dividend Champions from Dividend Contenders and how to add them to your portfolio.
Overview of Dividend Champions
Dividend Champions have fairly specific criteria, which are less stringent than the more renowned Dividend Aristocrats list. Dave Fish of the DRIP Investing Resource Center maintains the Dividend Champions spreadsheet. To be included on the Dividend Champions list, a stock must meet the following guidelines:
- It must have 25 consecutive years of dividend payout increases.
- It must trade in the United States.
Unlike the Dividend Aristocrats, Dividend Champions don't need to be S&P 500 members and have no minimum market cap or daily volume guidelines.
The key characteristic here is the 25 years of dividend payout increases. Note that this refers to the total dividend payout, not an increase in dividend yield. A company can remain a Dividend Champion even if the dividend yield decreases year-over-year (YOY). The "Dividend Champion" label will remain as long as the dividend payout continues to grow. Rapid increases in dividend yield can indicate an unstable company since the dividend payment obligations may become challenging to meet.
For example, Kinder Morgan Inc. (NYSE: KMI) had a dividend yield of 10.3% for Q1 in 2016. Later that year, the company slashed its dividend by 75% due to stagnant energy prices, taking the share price down.
When a company can increase its dividend payouts for 25 straight years, many investors consider it a safe and reliable business, but this eliminates a lot of growth-oriented stocks from the equation. Dividend Champions tend to reside in the industrial, energy, consumer staples and healthcare sectors.
Due to their lack of growth potential, Dividend Champion stocks are an excellent match for more conservative portfolios. You will find few 10-baggers in this group since they're established companies with stable sales and little interest in expanding into new businesses or industries. However, a portfolio of the top 25 dividend stocks is typical for investors approaching retirement age who want some margin of safety from their investments and steady income through dividend payment increases.
Dividend Champions vs. Dividend Contenders
What separates the Champions from the Contenders when it comes to dividend stocks? The same thing that often separates champions and contenders in sports like football — experience.
Dividend Contenders (like their counterparts, the Dividend Achievers) meet many of the same requirements as Dividend Champions, but they don't have as much experience enhancing their yearly dividend payouts consistently.
To qualify as a Dividend Champion, the company must have a minimum 25-year history of increasing its dividend payout. But the next tier down is the Dividend Contenders, which only have 10 years of dividend payout increases. Many companies on the Dividend Contenders list will grow into Dividend Champions if given time, but 25 years of dividend payout increases is a high bar to reach. Many firms fail to cross that threshold, even if they're well-run and profitable businesses.
Example of a High-Quality Dividend Champion
Looking for a top-notch Dividend Champion stock? Remember, when it comes to dividend stocks, it's often the most boring companies that rise to the top. In that regard, let's look at one of the bell cows of the Dividend Champions — the Clorox Company (NYSE: CLX).
Clorox is a consumer staples company that makes household products like cleaners, disinfectants, laundry detergent and other bleach products. Clorox owns brands like Brita, Glad, Kingsford, Pine-Sol and Fresh Step. The company has been in business since 1913, went public in 1928 and currently has a market cap north of $17 billion.
What makes Clorox a Dividend Champion? It has raised dividend payouts for 34 consecutive years. Clorox isn't exactly an exciting or groundbreaking company in terms of R&D, but it sells products that all consumers buy, regardless of economic climate or household balance sheets.
How to Invest in Dividend Champions
Investing in Dividend Champions doesn't require advanced market knowledge or the ability to decipher technical trading signals. But you need to understand how dividends distribute to maximize your investment profits. Here's how to get started:
Step 1: Open a brokerage account.
The first step is opening a brokerage account with access to shares of the dividend stocks you wish to purchase. Since Dividend Champions are well-known securities with ample liquidity, you should be able to locate them through most major brokerages in the United States.
Step 2: Determine how much capital to invest.
Next, figure out how much capital you want to devote to dividend stocks. You can make an entire portfolio out of these Dividend Champions or carve out a portion of your portfolio for them. Remember that Dividend Champion stocks tend to be less volatile than other securities.
Step 3: Figure out which Dividend Champions to buy.
Now decide which Dividend Champion stocks to buy. While stocks with 25 years of dividend payout increases are rare, there is still plenty to fill a portfolio within various industries. You could stick to specific sectors like healthcare or consumer staples with your Dividend Champion investments, or you may want to grab a company from each different industry. There's no right or wrong way to construct a dividend stock portfolio, provided the stocks in question meet the Dividend Champion criteria.
Step 4: Purchase shares before the ex-dividend date.
Here's the important part: To be eligible to receive the dividend, you must own the stock before the ex-dividend date. Doing so may seem redundant if you've owned the shares for years, but if you want to increase your stake in a particular company, make sure you purchase the shares before this date to maximize the income you receive from these payouts. If you buy shares after the ex-dividend date, you won't receive the dividend; the trader who sold you the shares will.
Dividend Champions Sector Breakdown
Let's take a look at a few of the sectors associated with Dividend Champions:
Market Capitalization of Dividend Champions
Dividend Champion market caps can come in a wide range of figures. Unlike the Dividend Aristocrats, there's no minimum market-cap number for inclusion as a Dividend Champion. However, many Dividend Champions already fall into the large-cap category since they're usually big, established companies with steady sales and leadership.
As mentioned above, Clorox has a market cap of $17 billion, which puts it in the mid-range for market caps among Dividend Champions. At the higher end, you'll find companies like medical supplier Becton, Dickinson and Company, which has a market cap of over $72 billion, or Caterpillar Inc., which is over $132 billion in terms of market cap. Of course, pharmaceutical giant Johnson and Johnson (NYSE: JNJ) has a nearly half-trillion-dollar market cap.
Dividend Champions: Stability in a Volatile World
Growth-oriented investors reaped the most rewards during the 10-year bull market following the Great Recession as rates plummeted and inflation stayed cool. But now that rates are rising and inflation has elevated, profitability and sustainability have reentered the conversation, and that's where stocks like the Dividend Champions could outperform.
Dividend Champions may not make you rich over a short period. Still, they are great stocks for conservative investors looking to preserve their purchasing power while earning consistent income. They are popular buys for retirement accounts like IRAs, especially Roth IRAs, where the dividend payouts won't be subject to taxation.
Here are a few frequently asked questions about investing in dividend-paying stocks:
How many Dividend Champions are there?
Generally, less than 200 Dividend Champions are trading at a given time. A company with 25 consecutive years of dividend payout increases is rare in public markets, so the list remains relatively short.
What are the highest-paying Dividend Kings?
How do you decide on the top dividend stocks?
Deciding which Dividend Champions to buy depends on individual preferences. Some dividend investors choose stocks from industries they're most familiar with; others try to diversify across sectors. Familiarize yourself with special dividends, which don't always factor into the Dividend Champion criteria.