Though there are a number of strategies that can help investors build wealth, buying dividend stocks is, arguably, one of the smartest ways to put your money to work.
Publicly traded companies that pay a regular dividend are usually profitable on a recurring basis and offer clear long-term growth outlooks. In other words, these are businesses investors can plug into their portfolios and not worry about.
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Furthermore, income stocks have a knack for outperforming companies that don't pay a dividend. According to a report published in 2013 by J.P. Morgan Asset Management, a division of money-center bank JPMorgan Chase, companies that initiated and grew their payouts between 1972 and 2012 generated an annualized return of 9.5%. By comparison, publicly traded stocks that didn't offer a payout between 1972 and 2012 delivered a meager annualized return of 1.6%.
Dividend stocks, and the ability to reinvest your dividends, can be a powerful wealth-creating tool.
Top-notch dividend stocks are few and far between
But let's make one thing clear: no two dividend stocks are alike. While there are well over 1,000 publicly traded companies offering a regular dividend, there are only a small number of income stocks that deliver a truly rock-solid payout, or have been doling out a dividend, without fail, for a lengthy amount of time.
In terms of "rock-solid payouts," I'm generally referring to Wall Street's Dividend Kings. These are publicly traded companies that have increased their base annual payouts for 50 or more consecutive years. Examples include healthcare conglomerate Johnson & Johnson (JNJ -0.36%) and beverage company Coca-Cola (KO -0.19%), which have both increased their annual payouts for 61 straight years, as well as consumer staples company Procter & Gamble, which nearly leads the pack with 67 years of consecutive dividend increases.
Johnson & Johnson is a particularly interesting case in the sense that it's one of only two publicly traded companies -- Microsoft being the other -- that bears a coveted AAA-credit rating from Standard & Poor's, a division of S&P Global. This rating, which is one level higher than the U.S. government (AA), implies that S&P has the utmost confidence J&J will service and repay its outstanding debts. That's a pretty big boost of confidence for a company with a 61-year streak of increasing its payout.
Meanwhile, only a little over a dozen publicly traded companies have been paying a consecutive dividend for at least 100 years. Many are well-known, brand-name businesses, including oil stock ExxonMobil (dividends paid since 1882), power tools company Stanley Black & Decker (dividends paid since 1876), and pharmaceutical giant Eli Lilly (dividends paid since 1885). Coca-Cola and Procter & Gamble also find themselves on this exclusive list.
For instance, Coca-Cola has been paying a regular dividend for 130 consecutive years. Its geographic diversity is practically unmatched, with the company operating in all but three countries worldwide, and sporting a product portfolio that features more than two dozen brands generating at least $1 billion in annual sales. While Coke's growth heyday went bye-bye a long time ago, its pricing power and brand value keep the profit (and income) needle pointing higher.
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This truly under-the-radar company is Wall Street's greatest dividend stock
However, these brand-name companies can't hold a candle to what's arguably Wall Street's greatest dividend stock: A small-cap water utility that virtually no investors have ever heard of named York Water (YORW -1.14%).
York's $574 million market cap is reflective of the relatively small area it provides water and wastewater services to. In aggregate, York provides its services to just 54 municipalities in three counties of South-Central Pennsylvania. Although the company occasionally grows by acquisition, its service area pales in size to a number of other water utility providers, such as American Water Works, which services around 1,600 communities in 14 states and has 3.4 million customers.
But what York lacks in customer size, it makes up for in reliability. You see, York Water has been as reliable as the rising sun when it comes to paying a dividend since its founding in February 1816. On May 2, 2023, the company declared its 610th consecutive dividend. Though the company hasn't always paid its dividend on a quarterly basis, it hasn't missed a dividend payment since James Madison was president of the United States. This more than 205-year streak of consecutive dividend payments is about 60 years longer than the next-closest competitor, Stanley Black & Decker.
Admittedly, some investors are going to have a hard time believing that a no-name water utility that averages 41,000 shares traded daily and offers just a 2% yield could be Wall Street's greatest dividend stock. But keep in mind that yield is a reflection of a company's share price divided by its annual payout. If the share price of a company rises significantly over time, it's perfectly normal for the yield to decline.
Since the start of the 21st century, the benchmark S&P 500 has tripled in value, and risen by closer to 368% when you include dividends paid. Meanwhile, York Water's shares are up 609% since Dec. 31, 1999, and more than 1,240% including dividends paid. It's more than tripled the total return of the broad-based S&P 500 over the past 23 years. York's 2% yield is fantastic considering the returns its patient investors have enjoyed.
York Water also delivers some of the most predictable operating cash flow among publicly traded companies. A big reason for this is because it's a regulated utility. In other words, it's unable to raise rates on its customers without approval from the Pennsylvania Public Utility Commission (PPUC). While this might sound like a nuisance, it's actually great news. It means York doesn't have to worry about wholesale pricing volatility.
The good news is the PPUC OK'd a rate increase on approximately 75,000 of York's customers in January 2023 that followed an aggregate of $176 million in investments by the company that were designed to improve its systems and infrastructure. This rate hike is estimated to lift York's annual revenue by $13.5 million, or roughly 22% from the $60.1 million reported in 2022.
York Water may not be a household name or have the highest yield, but when it comes to great dividend stocks, its streak of 205+ years of consecutive payouts is absolutely unrivaled on Wall Street.
