Down Between 11% and 62%: 3 Reliable Dividend Kings to Buy and Hold for Decades to Come

Although the stock market is forward-looking, there is something to be said about legacy companies with a track record for earnings and dividend growth. When it comes to dividend reliability, arguably the most elite accolade out there is to be a Dividend King.

A Dividend King is an S&P 500 component that has paid and raised its dividend for at least 50 years. Investing in equal parts of Stanley Black & Decker (NYSE: SWK), 3M (NYSE: MMM), and SJW Group (NYSE: SJW) produces a dividend yield of 3.7%. Here's what makes each company worth a look.

A welder works on top of a steel girder.

Image source: Getty Images.

Near-term risk, long-term reward at Stanley Black & Decker

Lee Samaha (Stanley Black & Decker): Just about everything that could go wrong did for the tools and hardware company in 2022. Its commodity and cost inflation was much higher than expected, mainly due to ongoing supply chain issues. Its U.S. tools sales took a hit as consumer spending slowed, particularly in the DIY category that did so well during the pandemic. Finally, poor weather in the summer led to weakness in its outdoor product range in the year when it was integrating its acquisition of MTD (lawn and garden products).

It's been a tough year for Stanley Black & Decker -- which has been reflected in the stock price. Stanley Black & Decker stock is down 62% from its all-time high.

As a result, having started the year forecasting full-year adjusted earnings per share (EPS) of $12 to $12.50, management now expects just $5 to $6.

That said, even if the low end of the new guidance range easily covers the company's $3.20 dividend per share (currently yielding 3.7%), management thinks it can hit $7.25 next year. Meanwhile, the company is launching a fundamental restructuring expected to result in $2 billion in cost savings (on an ongoing basis) in the next couple of years.

If the restructuring is successful, investors can expect significant earnings growth in the coming years. But if you do buy the stock, be aware that management is trying to reduce inventory in the current environment, which might result in some pressure on its pricing in the second half of 2022.

3M has serious legal headwinds, but there are some bright spots

Daniel Foelber (3M): 3M is facing legal challenges due to accusations it sold defective ear protection to the U.S. government. It is also dealing with the ongoing costs related to the use of per-and polyfluoroalkyl substances (PFAS) chemicals, also known as forever chemicals, in its end products and for contaminating groundwater with PFAS.

The estimated costs related to the legal repercussions of these two issues vary widely. Some fear that 3M could cut its dividend if costs get too high, or at the very least, could see a sharp decline in earnings as it pays legal fees and settlements.

Right now, it's too early to tell how the legal proceedings will unfold. And for many investors, it may be best to take a wait-and-see approach to 3M.

As bad as the situation appears, 3M does have some things going for it. The company has paid and raised its dividend for 64 consecutive years, making it one of the longest-tenured Dividend Kings.

3M also generates plenty of earnings and free cash flow (FCF) to cover its dividend payment. In fact, 3M's diluted earnings per share (EPS) and FCF have exceeded its dividend every single year for the last 20 years.

In this chart, you'll notice that 3M used just 58% of diluted EPS on the dividend -- or 59% of FCF. This is a sign that 3M's earnings and FCF could come down, and it could still afford its dividend.

MMM EPS Diluted (Annual) Chart
Data by YCharts.

Down 55% from its all-time high and trading near a nine-year low, now could be a good time to reach into the bargain bin and take a look at 3M stock. The out-of-favor 120-year-old company is an industry leader, has established business units and brands, and its stock has a dividend yield of 5.1%.

A higher yield makes this ticker the king among water-oriented Dividend Kings

Scott Levine (SJW Group): Between market volatility, escalating inflation, and geopolitical tension, investors have a lot on their minds these days. Any of those conditions could motivate investors to shift their focus toward conservative stocks.

But all three? That's a perfect time to consider fortifying one's portfolio with a low-risk utility stock that provides some passive income -- a stock like SJW Group. And with the stock down 11% from its all-time high, investors have the opportunity to fortify their portfolios and increase the flow of passive income with the help of SJW Group's stock.

One of three water utility stocks with the regal title of Dividend King, SJW Group distinguishes itself from its peers -- California Water Service Group and American States Water -- by offering the highest forward dividend yield: 2.2%. California Water Service Group and American States Water each offer forward dividend yields of 1.6% and 1.8%, respectively.

While SJW Group has some exposure to unregulated markets, the company's dealings in the regulated markets contribute most significantly to its bottom line. In 2021, for example, SJW Group reported that 93% of its net income was generated from its operations in regulated markets.

The market should eventually reward the utility's ample exposure to regulated markets since this business model affords management clear foresight into future cash flows -- a dynamic that allows the company to plan accordingly for capital expenditures. Investors interested in dipping their toes into an investment with a water utility should seriously consider SJW Group.

In addition, SJW Group plans to invest $1.3 billion over the next five years to upgrade its water and wastewater infrastructure, subject to regulatory approvals. Once complete, these capital expenditures should assist the company in expanding its profit margin, positioning it to extend its streak of dividend raises.

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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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