3 undervalued Dividend Kings for Steady Dividend Income

A dividend is the portion of a company’s profit that it pays to shareholders, and a dividend king company is one that has increased dividend payments annually for 50 years or more. In this post, we will look at 3 undervalued dividend kings, Coca-Cola (NYSE:KO), AbbVie (NYSE:ABBV), and Altria Group (NYSE:MO) stock and explain why it makes sense to add these undervalued dividend kings to your portfolio.

Dividends are an essential part of a well-managed and diversified investment portfolio; dividend kings are large, established companies with a significant market share. Dividends are desirable because;

You may get the double win effect of capital appreciation (stock price increase) to accompany your dividend. For example, a 5% capital appreciation plus a 2% dividend yield earns you 7% profit.

They may provide a steady, secure income stream. Payments received can be reinvested to buy additional stocks to compound your earnings.

They act as an inflation hedge as payments tend to increase when prices increase.

More “committed” investors tend to buy dividend stocks, so they are more willing to ride out busts when the market falls, unlike many non-dividend shareholders who get bearish.

Despite all the upsides, like every other investment, income stocks do pose financial risks. Financial risk is the possibility of losing money on an investment, but risk is required to make returns on investments (ROI). Strategic investors find creative ways to maximize rewards while reducing their exposure to losses.

Should Investors Review a Stocks Past Performance or Future Estimates?

The short answer is; both past performances and future estimates can play a vital role in helping you make an informed investment decision. The Securities and Exchange Commission (SEC) or any reputable financial market regulator requires that Funds advise clients of the disclaimer; “past performance is not indicative of future results.”

Generally, this is good advice, and you should always analyze the underlying numbers and future earnings projections to guide which shares you select. Historical performance is also a critical consideration, even more so when the performance occurs consistently over an extended period. Dividend kings need a minimum of 50 years of consecutive annual dividend payment increase, more than enough time to establish a credible trend. Blue Chip companies highlight the importance of past performance. A Blue Chip company not only needs to be well known and well-capitalized but must also be well-established with a solid reputation created over several years.

Dividend Aristocrats VS Dividend Kings

A dividend aristocrat is a company listed on the S&P 500 index that annually increases the size of its dividend payments for 25 years or more. The two main differences between a dividend king and a dividend aristocrat are the duration of annual payout increases and listing on the S&P 500. A dividend king does not have the S&P 500 listing requirement, and as we noted above, the duration of its annual increased dividend payments must exceed 50 years.

https://www.buymeacoffee.com/dividendtalk

The risk of investing in a dividend aristocrat with a positive earning outlook may be less than investing in a dividend stock that has only paid dividends for five years. The risk of investing undervalued dividend kings may be even smaller than investing in a dividend aristocrat. While the risks could be lower, there is no guarantee of returns.

Finding Dividend King Value

Investors focus on dividend yields that help calculate a share’s total shareholder return (TSR). Dividend yields are good indicators of payout sustainability or if shareholders are driving down a stock’s price. 1% to 3% yield is ideal, 4% to 10% yield requires careful analysis, but yields of 10% fall into the risky category.

With dividend kings, the chances of losing money are smaller, and yield rates are more stable. The most affordable dividend king stocks that pay the highest annual dividend offer the best value to your portfolio.

In the below table, we explored the cost and pre-tax annual dividend returns if you purchased 1000 units of each stock at the closing share price on October 19, 2021. We multiplied the annual dividend and the current share price by $1000 each to get the “pre-tax annual dividend returns” and the “cost for 1000 units” figures below.

We can see where 1000 units of PPG Industries (NYSE:PPG) stocks would cost more than three times 1000 units of Altria Group (NYSE:MO) stocks but earn you over $1000 less in pre-tax annual dividend returns. PPG industries stock would not provide good dividend value at its current price compared to other dividend kings.

Investing 100k

Based on current prices, If I had $100,000, I would break down my investment on the below undervalued dividend kings as follows:

$60 000 on Altria Group (NYSE:MO)
$20 000 on Coca-Cola (NYSE: KO)
$20 000 on AbbVie (NYSE:ABBV)

Of course, I would get the best returns by investing all the money in Altria, but doing so would set back my diversification strategy. Spending my $100,000 in a 3:1:1 ratio would offer diversification and earn me $6097.79. The 3:1:1 ratio would provide better value than investing one third in a 1:1:1 ratio on the same three dividend kings since that would only earn me $5152.54 at current prices, a difference of $945.25.

Potentially undervalued Dividend Kings Comparison

Company	Sector	Consecutive Years of Dividend Increases	Share Price*	Annual Dividend	Dividend Yield	Pre-Tax Annual Dividend Returns on 1000 Units	Cost for 1000 units
PPG Industries (NYSE:PPG)	Materials	50	158.94	$2.36	1.48	$2,360	$158,940
AbbVie (NYSE:ABBV)	Healthcare	49	107.45	$5.20	4.84	$5,200	$107,450
American States Water (NYSE:AWR)	Utilities	67	89.25	$1.46	1.64	$1,460	$89,250
Sysco (NYSE:SYY)	Consumer Defensive	52	80.7	$1.88	2.33	$1,880	$80,700
Colgate-Palmolive (NYSE:CL)	Consumer Defensive	58	74.78	$1.80	2.41	$1,800	$74,780
SJW Group (NYSE:SJW)	Utilities	53	67.83	$1.36	2.01	$1,360	$67,830
Coca-Cola (NYSE:KO)	Consumer Defensive	59	54.15	$1.68	3.10	$1,680	$54,150
Altria Group (NYSE:MO)	Consumer Defensive	51	47.9	$3.60	7.52	$3,600	$47,900

*Figures are at Close of Trade Oct.19, 2021

Coca-Cola (NYSE:KO)

Company	Sector	Consecutive Years of Dividend Increases	Share Price	Annual Dividend	Dividend Yield	Pre-Tax Annual Dividend Returns on 1000 Units	Cost for 1000 units
Coca-Cola (NYSE:KO)	Consumer Defensive	59	54.15	$1.68	3.10	$1,680	$54,150

Coca-Cola (NYSE:KO) is probably the most popular dividend king on the list; the company doubled its marketing spend to boost recovery to pre-pandemic levels, and those investments have been paying off. Coca-Cola remains on a solid growth trajectory as current-year earnings per share estimates are $2.25 (+15.38%) while revenue estimates stand at approximately $37.8 billion (+14.49). The 2022 projections are even more favorable.

The Wall Street Journal’s current projection has the stock’s price rising as high as $67. If you can purchase Coca-Cola shares close to their current price, you would correspond with 12 of the 38 analysts who follow the stock and have rated it as a buy.

AbbVie (NYSE:ABBV)

Company	Sector	Consecutive Years of Dividend Increases	Share Price	Annual Dividend	Dividend Yield	Pre-Tax Annual Dividend Returns on 1000 Units	Cost for 1000 units
AbbVie (NYSE:ABBV)	Healthcare	49	107.45	$5.20	4.84	$5,200	$107,450

The fact that pharmaceutical company AbbVie (NYSE:ABBV) has only completed 49 years of consecutive annual dividend payment increases means AbbVie will not be a dividend king until next year. But we couldn’t resist the attractive $5.20 annual dividend that the 4.84% yield tells us is sustainable. Like all the other dividend kings listed, AbbVie’s fundamentals are looking great. The 2021 low revenue estimates are $55.05 billion, with $57.15 billion projected for 2022.

The Wall Street Journal’s current projection has the stock’s price rising as high as $144, making the current $107.45 price look like a steal. 12 of 21 analysts following AbbVie have rated it as a buy, with the rest providing favorable overweight or hold ratings.

Altria Group (NYSE:MO)

Company	Sector	Consecutive Years of Dividend Increases	Share Price	Annual Dividend	Dividend Yield	Pre-Tax Dividend Annual Returns on 1000 Units	Cost for 1000 units
Altria Group (NYSE:MO)	Consumer Defensive	51	47.9	$3.60	7.52	$3,600	$47,900

Altria Group (NYSE:MO) is moving beyond smoking. The company is seeking to help millions of adult smokers transition to less dangerous vaping products. Despite a high tax burden consuming almost 20% of its earnings, Altria maintains stable revenues. An earnings increase is likely, with earnings per share (EPS) set to jump from 2.40 in 2020. The low EPS estimates stand at approximately 4.55 for 2021 and 4.65 in 2022.

Altria provides the best value among the dividend kings, as suggested by its low price and the high annual dividend. The 7.52% yield is sustainable, and The Wall Street Journal’s current projection has the stock’s price rising as high as $68, suggesting that the $47.9 is a bargain. Eight of 19 analysts who follow Altria have rated it as a buy, one as overweight, and ten as a hold. None have issued an unfavorable rating.

The Bottom Line

Dividend kings are among the safest dividend-paying stocks you can earn income from without the high risk of the stock price falling too sharply without rallying shortly after. Dividend kings also offer a lower risk of the company not being able to sustain the dividend payment. Investors seeking dividend king stock have more freedom to look for the lowest-priced shares offering competitive dividend rates.

You minimize your risks by holding dividend king stocks due to how well established these companies are and their solid dividend payment records. It is still prudent however to review the underlying numbers and future earnings projections before investing in a dividend king company. Do your analysis and start earning steady, passive income now with these dividend kings.

References

https://www.educba.com/financial-risk/

https://www.investopedia.com/terms/d/dividend-aristocrat.asp

https://www.investopedia.com/ask/answers/031915/what-qualifies-company-blue-chip.asp

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