How to Invest Like a Dividend King

“Mom and pop” investors may feel like it’s hard to outperform the market in an environment of low inflation and rising interest rates.

But a “dividend king” could be the key to longer-term success for investors in retirement. That is, in that long run, the ability to produce and grow income will mean the most to retirees living on fixed incomes.

“Dividend kings” are companies that have raised their dividends for the last 25 years or more. Their model is to earn strong operating results and increase their payouts as more cash flow accumulates. That provides a stability to the companies and helps to minimize the damage from downturns in the economy.

Dividend kings tend to have less risk. They’re not as sensitive to the ups and downs of the economy as more risky businesses. And that may prove to be the most important advantage over younger generations.

“Life Expectancy is really just a function of size,” said David Olive, founder of CGM Focus Fund. “So [in] 1972, if you were to run a study looking at your long-term survival, there might have been 3,000 individuals who would have gone to the grave on account of age 70.”

In addition to that study, Olive notes, longevity data has shown that past performance is no guarantee of future results. That means younger people should be able to use dividend kings as a way to increase their wealth for a longer time.

One of the reasons more investors ignore “dividend kings” is that they are not necessarily eye-catching names. Many often look for an “in,” which some investors consider an unrealistic goal in today’s market.

But Olive would caution that there are some options available that could allow you to beat the market. Some of these are relatively low risk, while others are “very appealing,” he said.

Olive presented three ideas that generate strong cash flow and can deliver an attractive dividend yield:

Chevron (CVX), $116

Dividend yield: 3.2 percent

Current yield: 6.5 percent

Yields: by method of comparison with the broader stock market

Part of the reason Chevron is attractive is because of its superior growth potential compared to most other companies. While most businesses are riding low interest rates to improve growth, Chevron has a rock-solid cash flow that has a lot of room to increase.

At the same time, Chevron benefits from a strong free cash flow from its operations. That allows the company to continually invest in new production and reserves, and thus to increase its net income even in difficult economic periods.

Like the majority of oil companies, Chevron has been plagued by the financial impact of the OPEC countries sanctioning oil output and the selling price. But the company is the largest producer of natural gas in the U.S. and its three domestic projects have likely saved it from the bankruptcy or default of many of its peers.

A close examination of Chevron’s financials shows that the company is conservative and well-run and could also have a strong record of reliability, performance and economic goodwill.

Johnson & Johnson (JNJ), $119

Dividend yield: 2.4 percent

Current yield: 3.8 percent

Yields: by method of comparison with the broader stock market

U.S. consumers like to take care of themselves and their families. They rely on branded products that provide a regular stream of revenue from its customers and steady earnings.

Johnson & Johnson fits that mold. Its consumer segment is the company’s largest and constitutes 40 percent of sales and 80 percent of earnings.

In the past year, J&J’s medical segment, pharmaceutical segment and medical device segment have all performed very well. The medical segment includes products like J&J’s Band-Aid brand bandages and Tylenol brand of pain killers.

Due to this breadth of products and the fact that J&J is so geographically diverse, it has a global footprint and generates revenue across all parts of the economy, it’s difficult to gauge the company’s financial success. But it’s not hard to judge the relationship between the company’s earnings, cash flow and dividend yield.

Perhaps the most powerful metric is cash flow, which compares cash generated from the company’s various business units

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