Meet Wall Street’s Safest Dividend Stock: A Small-Cap Company Few Investors Know Exists

For the past century, Wall Street has stood on a pedestal above all other asset classes. While Treasuries, housing and commodities like gold, silver and oil have had their moments in the sun and in many cases made investors rich, no asset class has come close to the average annual return of stocks of late . century.

One of the best things about putting your money to work on Wall Street is that there are thousands of publicly traded companies and exchange traded funds (ETFs) to choose from. It’s almost a certainty that there’s a security or 10 that fits your risk tolerance and/or investment goals

But among the myriad ways to make money in the stock market, few strategies have been more successful than buying and holding high-quality dividend stocks over a long period of time.

Image source: Getty Images.

Last year, investment advisers at Hartford Funds released a lengthy report extolling the virtues and performance of dividend stocks. In particular, The Power of Dividends: Past, Present and Future compared the performance of dividend-paying and non-dividend-paying stocks over the previous half-century.

According to the report, dividend stocks had an average annual return of 9.17% between 1973 and 2023, and did so while being 6% less volatile than the benchmark. S&P 500. Meanwhile, public companies that didn’t offer a payout cruised to a less impressive annualized return of 4.27% over the same 50-year period and averaged 18% More more volatile than the S&P 500.

Companies that regularly share a percentage of their profits with investors — even if those payouts don’t necessarily grow annually — tend to be repeatedly profitable, time-tested, and usually able to provide transparent long-term growth prospects . In short, they are just the kind of businesses that we would expect to grow in value over time.

Wall Street has no shortage of amazing dividend stocks to choose from

Although good over 1,000 stocks currently pay a dividend to their shareholders, no two income stocks are the same. When it comes to consistency and safety, some dividend stocks naturally rise to the top.

A good example is the consumer goods giant Coca cola (K.O -1.92%). In February, it increased its quarterly dividend for the 62nd consecutive year. In addition, the company has paid a continuous dividend without interruption since 1920.

The secret of Coca-Cola’s success is no secret at all. It offers a basic necessity (beverages) that will be purchased in any economic climate and is geographically diverse, with operations in all but three countries (North Korea, Cuba and Russia).

Coca-Cola also has a strong brand that resonates with shoppers. Kantar’s annual ‘Brand Footprint’ report has labeled Coca-Cola as the most chosen brand on retail shelves for 12 consecutive years.

Health conglomerate Johnson & Johnson (JNJ -1.42%) is another great example of a top dividend stock that provides safe and predictable income year after year. In April, J&J’s board matched Coca-Cola by increasing its annual base pay for the 62nd consecutive year.

Regardless of what happens to the US/global economy or the stock market, people still develop illnesses and require medical care. This means that demand for new therapies and medical devices will be constant, leading to transparent and predictable operating cash flow.

Johnson & Johnson is also one of only two publicly traded companies that still holds the coveted AAA credit rating from Standard & Poor’s (S&P), a division of S&P Global. This rating, which is a notch higher than the US government’s, signifies S&P’s utmost confidence in servicing and repaying J&J’s outstanding debt.

But at the end of the day, neither Coke, Johnson & Johnson, nor the 1,000+ other dividend stocks out there can hold a candle, in terms of dividend safety and consistency, to an off-the-radar one. small-cap stocks that few investors know exist.

Image source: Getty Images.

Say hello to Wall Street’s biggest (and most undervalued) dividend stocks

The mystery stock that can be described as the safest and most consistent dividend payer is York Water (YORW -0.47%)a $548 million market cap water and wastewater utility company serving 56 four-county municipalities in south central Pennsylvania.

To say York flies under the radar would be an understatement. Over the past three months, the average daily trading volume is 58,329 shares. On any given day, just over $2 million worth of the company’s stock trades hands. But this low-key water utility has a pretty storied history of sharing a percentage of profits with its investors.

Since York Water was established in 1816, the company has paid a continuous dividend to its shareholders. Although the company doesn’t raise its payout in consecutive years like Coca-Cola and Johnson & Johnson, its 208-year streak of dividend growth exactly doubles Coca-Cola’s 104-year streak. Based on the research I’ve done, York’s rolling dividend streak is 60 years more than the nearest continuous series of payments from a US public company, Stanley Black & Decker.

The security of York’s payment can be traced to four factors.

For starters, water and wastewater service are basic necessities. Whether you own or rent, you’ll need these services. Furthermore, demand for water and wastewater services does not change much from year to year, resulting in highly predictable operating cash flow.

Second, the barrier to entry among utilities is usually high. Most utilities operate as monopolies or duopolies in the regions they serve, meaning that consumers rarely, if ever, have the opportunity to choose which company provides their service. With infrastructure upfront costs often prohibitive, York Water does not have to worry about competing for its customers. Once again, this results in a transparent and predictable cash flow.

The third important element of York’s success is that it is a regulated water utility. “Regulated” utilities must first get approval from a state’s public utility commission (in this case, the Pennsylvania Public Utilities Commission, or PPUC) to increase rates to customers. While this might seem inconvenient, it ensures that York does not have to deal with unpredictable wholesale prices for its services.

In January 2023, the PPUC gave York the go-ahead to raise rates for about 75,000 of its customers to offset $176 million in various system improvements and infrastructure replacements. York’s annual revenue rose 18% last year on the back of that growth.

YORW Income Data (Annual) by YCharts.

Finally, York Water has not been shy about making acquisitions to expand its reach. A steady diet of earnings-enhancing bolt-on acquisitions ensures York can maintain its dividend streak.

Although some investors are likely to criticize the fact that York would “only” get 2.2%, remember that the yield is a function of the share price. Despite its quarterly payouts rising 164% since the turn of the century, York shares are up 573% over the same period. In other words, the only reason York’s yield is 2.2% is because its share price has risen significantly over time. It’s nothing for shareholders to complain about.

While you can find plenty of dividend stocks with higher yields than York Water, you won’t find a company with a more stable or reliable payout history.