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3 Dividend Kings Poised to Outperform the Market

dividend kings stocks

In the critically acclaimed 1999 Warner Brothers film ‘Three Kings,’ George Clooney, Ice Cube, Spike Jonze and Mark Wahlberg are four American soldiers that embark on a gold heist in post-war Iraq. Spoiler alert: the stolen gold is eventually returned to Kuwait, and the surviving soldiers are honorably discharged.

In the 2023 American stock market, ‘three kings’ can refer to several things. The dominance of the technology, telecommunications and consumer discretionary sectors. The S&P 500’s runaway year-to-date winners — NVIDIA, Meta Platforms and Tesla — each of which have more than doubled.

The phrase also calls to mind an exclusive group of stocks called ‘Dividend Kings.’ These are publicly traded companies that have raised their dividend payments for 50 or more consecutive years. Their dividend longevity is an attractive quality to value investors who rely on consistently growing income streams.

Out of more than 6,000 U.S. listed stocks, only 44 (0.7%) have earned the title of Dividend King. The most recent companies to don the crown are Lowe’s, Nucor, Tennant and Consolidated Edison — all of which reached the 50-year mark this year. Others like American States Water, Procter & Gamble, Genuine Parts and Dover are nearing a remarkable 70 straight years of dividend hikes.

Of course, the dividend is only one component of a Dividend King’s total return. While the group has one powerful commonality, there are stark differences in individual growth outlooks and price appreciation potential.

Over the next 12 months, Wall Street actually sees a handful of Dividend Kings generating negative returns. At the other end of the battlefield, these three soldiers are expected to deliver dividend gold — and then some.

What Is Emerson Electric’s Dividend Growth Streak? 

Emerson Electric Co. (NYSE: EMR) has increased its dividend in each of the last 66 years. The global electrical equipment leader (and S&P 500 component) currently pays a $0.52 per share quarterly dividend, which equates to a 2.1% forward yield. Although recent dividend hikes have only been in the 1% to 2% range, the company is a reliable cash flow machine that in fiscal 2022 covered its debt interest expense by an impressive 19-to-1 ratio. 

In the current fiscal year, Emerson Electric is benefiting from a strategic pivot away from legacy businesses like InSinkErator towards new businesses that have better long-term growth prospects. Increasing exposure to energy security, decarbonization and enterprise digital transformations have brightened the five-year outlook.  

The shift has also brightened analyst sentiment towards the stock. Following a breakout fiscal third-quarter earnings report, Emerson has been upgraded to ‘buy’ twice and received several price target increases. Revised targets on the approximately $98.00 stock range from $95.00 to $120.00.

Does Lancaster Colony Stock Have Good Upside?

Lancaster Colony Corporation (NASDAQ: LANC) is actively followed by only one Wall Street firm, so the lack of coverage should be considered a caveat. With this said Loop Capital Markets is very bullish on the name behind Marzetti salad dressings, New York Bakery Texas toast and Sister Schubert’s rolls. Last month, the analyst there reiterated his buy rating and set a $226 price target that implies a nearly 40% upside from current levels. Not bad for a defensive packaged food stock!

The bullish opinion stems from the company’s fiscal fourth-quarter report, which revealed flat year-over-year sales but came with a side of fiscal 2024 optimism. CEO David Ciesinski outlined several upcoming tailwinds, including 1) volume growth tied to a revamped licensing program that will soon welcome Texas Roadhouse steak sauces, 2) new product and flavor launches, and 3) the profit-boosting combination of price increases and cost cuts. 

On June 30th, Lancaster Colony shareholders received a $0.85 per share dividend that was 6% above the prior year’s payout — and marked the 60th straight year of dividend growth. Popular grocery store and food service brands, a debt-free balance sheet and a rising 2.1% dividend make the dip in LANC well worth dipping into.

Are Sysco Shares Undervalued?

At 20x trailing 12 months earnings, Sysco Corporation (NYSE: SYY) is undervalued from multiple angles. The food distributor has garnered an average P/E ratio of 37.5x over the last five years, which means it trades at a steep discount to its own history. Its closest competitor, U.S. Foods, is trading at 21x earnings and mid-cap peer Performance Food Group goes for 29x earnings.

Sysco bears, however, argue that the valuation is low for good reason. The company is facing rising food product and labor costs that are expected to weigh on profitability. Still, Wall Street is forecasting 8% earnings per share (EPS) growth for the current fiscal year, which 1) is quite good for a low-margin consumer staple and 2) is expected to set the stage for faster growth in fiscal 2025.

Sysco’s attractive valuation, favorable outlook and leading position in the food distribution space are big reasons why analysts are bullish. Eight out of nine have buy ratings on the stock, and the group’s average price target ($85.56) implies almost 25% upside. Tack on a 2.9% dividend, which has been raised for 55 consecutive years, and this Dividend King could be in for a nice ride over the next 12 months.

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