Dividend King Trading Strategy (Backtest – Does It Work?)

Last Updated on January 17, 2023

While some investors focus on capital appreciation, others are more interested in stocks that consistently pay dividends. These consistent dividend-paying stocks are grouped into categories and given some cool names, such as Dividend Aristocrats and Dividend Kings. Our interest here is in the latter. What is the Dividend King trading strategy?

Dividend Kings are companies that have reached at least 50 consecutive years of payout growth. A Dividend King trading strategy is a stock investment strategy that focuses on investing in companies that have a long history of consistently increasing their dividend payouts to shareholders.

In this post, we answer some questions about the Dividend King trading strategy. At the end of the article, we backtest the strategy.

What is a Dividend King Trading Strategy?

A Dividend King trading strategy is a stock investment strategy that focuses on investing in companies that have a long history of consistently increasing their dividend payouts to shareholders. These companies are often considered to be financially stable and reliable, and they may be less risky investments than other stocks. The strategy involves identifying these companies, researching their financials, and then investing in them with the expectation that their dividends will continue to grow over time. The goal is to generate a steady stream of income from the dividends, while also potentially benefiting from capital appreciation of the stock.

Unlike Dividend Aristocrats, Dividend Kings don’t have to be members of the S&P 500, but they must reach at least 50 consecutive years of payout growth. These companies have demonstrated a commitment to returning value to shareholders through dividends, which can be a positive sign for their health and stability.

The Dividend King strategy is that it can provide a way to generate income in a portfolio while also potentially reducing overall portfolio risk. By investing in companies with a history of consistent dividend growth, investors can potentially enjoy a steady stream of income without having to rely on volatile capital gains. Note that the Dividend King strategy is not a one-size-fits-all and it requires research and due diligence to identify the companies with a strong history of increasing dividends, a strong financial position, and a sustainable business model. It’s also important to diversify the portfolio and not put all eggs in one basket.

What are the Benefits of Dividend Kings Trading?

There are many benefits to using a Dividend King trading strategy:

  • Consistent income: Dividend Kings are companies that have a long history of consistently increasing their dividend payouts, which can provide a steady stream of income for investors.
  • Financial stability: Companies that have a strong track record of increasing dividends are often financially stable and reliable, which can make them less risky investments.
  • Capital appreciation: Investing in companies with a history of consistent dividend growth can also potentially lead to capital appreciation of the stock over time.
  • Reduced portfolio risk: By investing in companies with a history of consistent dividend growth, investors can potentially reduce overall portfolio risk while still generating income.
  • Diversification: Dividend Kings are often from different industries and sectors, so investing in a basket of Dividend Kings can provide diversification in the portfolio.

How to Select Dividend Kings?

These are some of the factors to consider when selecting Dividend Kings:

  • Dividend History: Look for companies that have a long track record of consistently increasing their dividends.
  • Financial Stability: Investigate the company’s financials to ensure that it has a strong balance sheet and is in a financially stable position.
  • Dividend Yield: Look for companies with high dividend yield, but it’s important to also consider the sustainability of the dividend payouts.
  • Earnings and Cash Flow: Make sure the company has consistent earnings and cash flow to support its dividends.
  • Growth prospects: Evaluate the company’s growth prospects and its ability to continue growing its dividends in the future.

What are the Best Practices for Dividend Kings Trading?

Here are some best practices for implementing a Dividend King trading strategy:

  • Conduct thorough research and due diligence on each potential Dividend King before making an investment.
  • To reduce portfolio risk, diversify your portfolio by investing in a basket of Dividend Kings from different industries and sectors.
  • Consider the long-term prospects of the company when making investment decisions.
  • Keep an eye on the fundamentals to make sure that the company is still in a strong financial position and able to continue increasing dividends
  • Monitor the economy and the market trends and make adjustments to your portfolio as necessary to protect your investments
  • Have a trading plan in place for when to buy, hold, and sell the stocks
  • Be prepared to hold the stock for a while to benefit from the growing dividends and potential capital appreciation
  • Consider the tax implication of your investments, as dividend income is generally taxed at a higher rate than capital gains

What are the Risks of Dividend Kings Trading?

Dividend Kings trading can come with the following risks:

  • Company risks: The companies can have financial issues and stop or suspend dividend payments, or even go bankrupt and fold up
  • Economic risks: Economic downturns or recessions can negatively impact the overall market and individual companies’ profitability, which can in turn lead to a reduction or suspension of dividends
  • Interest Rate Risks: Rising interest rates can make bonds more attractive to investors, leading to a decrease in demand for dividend-paying stocks and potentially leading to a decrease in stock prices
  • Growth risks: Dividend Kings are often mature companies with limited growth prospects, so they may not have much room to grow and may be overvalued, which can increase the risk of future dividend cuts.
  • Tax Risks: Dividend income is generally taxed at a higher rate than capital gains, so investors need to keep an eye on the tax implications of their investments.

How to Manage Risk when Trading Dividend Kings?

These are some things you can do to manage risk when trading Dividend Kings:

  • Have a diversified portfolio.
  • Conduct proper research and due diligence before investing in any company.
  • Keep an eye on the companies’ fundamentals to be sure that they are still in a strong financial position and able to continue increasing dividends.
  • Monitor the economy and the market trends
  • Have a risk management plan, including position sizing and stop loss strategies.
  • Have realistic expectations so you don’t get disappointed
  • Keep an eye on taxes.Top of Form

What are the Strategies to Maximize Returns with Dividend Kings?

Here are some strategies to maximize returns with Dividend Kings:

  • Reinvesting your dividends back into the stock so as to compound the growth of your investment over time
  • Using dollar-cost averaging to smooth out the effects of market volatility and lower the average cost per share over time
  • Investing in a basket of Dividend Kings to maintain a diversified portfolio.
  • Having a long-term focus
  • Keeping an eye on the fundamentals of all the companies in your portfolio to know when to dump shaky companies
  • Keeping an eye on the economy and the market trends to know when to make adjustments to your portfolio as necessary to protect your investments
  • Having a plan in place for when to buy, hold, and sell the stocks
  • Using a tax-advantaged account

How to Create an Effective Dividend Kings Portfolio?

Here is how to create an effective Dividend Kings portfolio:

  • Research every company you want to invest in, evaluating the company’s financials, dividend history, growth prospects, and industry trends.
  • Diversify your portfolio by investing in a basket of Dividend Kings from different industries and sectors.
  • Have a good proportion of small-cap and mid-cap companies in your portfolio, as they may offer higher growth potential, but they also come with higher risk.
  • Set a target allocation for each stock in the portfolio, and make sure to keep your portfolio balanced, and not over-concentrated in a single stock or sector.
  • Rebalance your portfolio periodically to make sure it still aligns with your investment goals and risk tolerance.
  • Keep an eye on the fundamentals of all the companies in your portfolio to know when to dump shaky companies
  • Keep an eye on the economy and the market trends to know when to make adjustments to your portfolio as necessary to protect your investments

What is the Best Time to Buy Dividend Kings?

There is no definitive best time to buy Dividend Kings, as the timing of an investment will depend on various factors such as the company’s financial performance, market conditions, and the investor’s goals and risk tolerance. However, here are a few general guidelines to keep in mind when considering when to buy Dividend Kings:

  • Buy when the stock is trading at a discount
  • Consider buying when the overall market is in a bearish phase, as Dividend Kings may tend to be less volatile and can provide a stable income
  • Buy when the company’s fundamentals are strong
  • You can use dollar-cost averaging to avoid timing the market and also smooth out the effects of market volatility

Which Dividend Kings Offer the Highest Yields?

Dividend yield is the annual dividend per share divided by the stock’s price per share. The highest yields can change often and depend on the stock prices and dividends at a specific point in time.

These are some Dividend Kings that have historically offered high yields include:

  • Procter & Gamble (PG): Procter & Gamble is a consumer goods company that has a long history of increasing dividends and has been consistently paying dividends for over 60 years. Its yield is around 2.5%.
  • Johnson & Johnson (JNJ): Johnson & Johnson is a healthcare company that has a long history of increasing dividends and has been consistently paying dividends for over 55 years. Its yield is around 2.5%.
  • AT&T (T): AT&T is a telecommunications giant that has a long history of increasing dividends and has been consistently paying dividends for over 30 years. Its yield is around 6%.

Note that some companies may be offering high yields but they may not be sustainable in the long run and their dividends may not be safe.

What are the Tax Implications of Dividend Kings Trading?

The tax implications of Dividend Kings trading can vary depending on the investor’s country of residence and the type of investment vehicle used. In general, dividends are taxed at a different rate than capital gains.

In the United States, dividends are generally taxed as ordinary income, which means they may be subject to higher tax rates than capital gains. Consult with your tax adviser to know what applies to your situation.

What are the Most Popular Dividend King Trading Strategies?

Some of the most popular strategies include:

  • Dividend Reinvestment Plan (DRIP) — allows investors to automatically reinvest dividends back into the stock, which can compound the growth of their investment over time.
  • Dividend Growth Investing — focuses on investing in companies with a long history of consistently increasing dividends
  • Dividend Income — focuses on companies that offer high yields and pay consistent dividends, with the goal of generating a steady stream of income in the short term.
  • Dividend Value Investing — focuses on investing in companies that are undervalued and have a

What are the Pros and Cons of Dividend Kings Trading?

Dividend Kings trading can come with some potential advantages and disadvantages.

Pros:

  • Consistent income
  • Less return volatility
  • Potential for capital appreciation
  • Lower risk

Cons:

  • Limited growth potential
  • Tax implications
  • Dependence on dividends
  • Dividends not guaranteed
  • Potential for dividend cuts

How to Monitor and Adjust Your Dividend Kings Portfolio?

Monitoring and adjusting your Dividend Kings portfolio is an important part of managing risk and maximizing returns. Here are some ways you can monitor and adjust your portfolio:

  • Regularly review your portfolio
  • Keep an eye on the fundamentals to be sure that the company is still in a strong financial position and able to continue increasing dividends
  • Monitor the economy and the market trends
  • Rebalance your portfolio periodically to make sure it still aligns with your investment goals and risk tolerance — sell underperformers and reallocate the funds to other companies that are in a stronger position
  • Have a plan in place for when to buy, hold, and sell the stocks

What are the Latest Trends in Dividend Kings Trading?

Some of the latest trends in Dividend Kings trading include:

  1. ESG (Environmental, Social, Governance) investing — focusing on companies with sustainable practices, diversity, and responsible corporate governance
  2. Tech dominance — Technology companies are getting into the Dividend Kings category
  3. Dividend ETFs and Mutual Funds — another way for investors to have a diversified portfolio of Dividend Kings

Dividend King Trading Strategy Backtest – Does It Work

A backtest with trading rules and settings is coming shortly.

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