Wall Street Secret Revealed: Invest in This Underdog for Dividend Growth That Beats the Giants
By April Fowell
- The diversity in investment strategies based on individual objectives, risk tolerance, and preferences is a key aspect of Wall Street investing.
- A Hartford Funds paper revealed that, over a 50-year period, dividend-paying stocks outperformed non-payers with an average annualized return of 9.18%, compared to 3.95%. The former also exhibited lower volatility.
- Notable examples of successful dividend stocks include Coca-Cola and Johnson & Johnson, both consistently raising dividends for 61 consecutive years. In contrast, a lesser-known water utility stock, York Water, stands out with a remarkable 208-year streak of continuous dividend payments, reflecting its stability in providing essential services.
The fact that there is no one-size-fits-all formula for success is among the finest things about investing on Wall Street. There's virtually likely a method that can increase your wealth over time, depending on your objectives, level of investing risk tolerance, and hobbies.
The preceding is true, but there is a catch: it is difficult to surpass dividend stocks' long-term outperformance.
A paper published by the Hartford Funds last year titled "The Power of Dividends: Past, Present, and Future" looked at the annualized returns of dividend-paying equities to non-payers over a 50-year period (1973-2022), working with Ned Davis Research.
Over 50 years, dividend stocks yielded an average annualized return of 9.18%, whereas non-payers yielded a meager 3.95% annualized return. Compared to the non-payers, the dividend payers exhibited significantly lower volatility.
However, a strong dividend investment is about more than just yield. Nothing matters more, perhaps, than a payout's durability, which is something that ultra-high-yielding dividend companies frequently lack.
Several of the best dividend stocks available globally are well-known, established businesses that have been steadily raising their dividends for many years. Two prime examples are Coca-Cola (NYSE: KO) and Johnson & Johnson (NYSE: JNJ), both of which have raised their base yearly rewards for 61 straight years.
As it happens, Standard & Poor's, a branch of the more well-known S&P Global, now only awards the highest possible credit rating (AAA) to just two publicly listed businesses, including Johnson & Johnson.
Operating in a highly defensive industry and increasing its dependence on high-margin pharmaceuticals have allowed Johnson & Johnson to expand its adjusted earnings consistently over decades. It has thus had no issue giving its investors a larger portion of its profits.
In the meanwhile, Kantar's "Brand Footprint" report states that Coca-Cola has been the most selected brand annually for the past ten years (as of 2022). Coke sells necessities, has a top-notch marketing effort, and is present in all but three of the world's countries.
People will always purchase beverages, regardless of how well or poorly the local or global economy is doing. For this reason, Coca-Cola's cash flow is quite predictable.
Assessing a company's dividend excellence might also involve looking at how long it has been paying out dividends consistently. Since the 19th century, a little more than a dozen publicly listed corporations have consistently paid out dividends.
Power in Water
However, the consistency of one small-cap water utility stock far outweighs that of any of these well-known companies. It is York Water (NASDAQ: YORW), a supplier of water and wastewater services.
At $510 million in value, York Water is a water provider serving 54 communities across three counties in South Central Pennsylvania. It also shows how obscure it is still, with an average of less than 48,000 shares exchanged on the Nasdaq market each day.
Its dividend streak, which extends more than 200 years, is something that no other dividend stock offers, despite its small size.
York Water created history once more on January 16, 2024, when it paid a dividend to its stockholders. Based on continuous dividend payments, York has paid its stockholders for 208 years running, 60 years longer than the next-closest firm, Stanley Black & Decker.
York is unique in part because it offers a service for fundamental needs. It is almost a given that you will require water and wastewater services whether you buy or rent a house. In addition, the majority of utilities function in their service regions as monopolies or duopolies. This means that the company's operational cash flow will be quite predictable every year.
York's status as a regulated utility contributes to its predictability. Before raising rates, "regulated" utilities must obtain approval from state public utility commissions, in York's case the Pennsylvania Public Utility Commission (PPUC). While this may seem like a hassle, it guarantees that the business won't have to deal with erratic wholesale prices.
It's also important to remember that York Water received approval from the PPUC in January 2023 to raise rates on 75,000 customers in order to cover $176 million in ongoing and planned infrastructure upgrades. York's yearly income was predicted to increase by almost 22% as a result of this rate hike last year. The profit needle is moving higher as a result of these rate increases and a consistent diet of add-on purchases.
Although some investors may argue that York's 2.4% yield is too low to qualify as "Wall Street's Greatest Dividend Stock," it is advisable those people to examine York's overall return-including dividends-during the last 25 years. York's 1,030% overall return has nearly twice the benchmark S&P 500's total return. York is only offering a meager 2.4% dividend since its stock has done significantly better than the overall market.