We recently compiled a list of the 10 Best Dividend Kings to Buy for Safe Dividend Growth. In this article, we are going to take a look at where American States Water Company (NYSE:AWR) stands against the other dividend stocks.

Investors often closely track the fluctuations of the stock market, eagerly expecting price increases. However, they may overlook another significant source of returns: dividends paid by companies to their shareholders. This aspect becomes even more appealing when considering companies that have a track record of consistently increasing their dividends over time. That’s where Dividend Kings come into play. These companies have raised their payouts for at least 50 consecutive years, which is not as easy as it sounds. Hence, only 54 out of thousands of publicly traded companies in the US have managed to achieve this goal.

Dividend stocks have played an important role in the market’s overall returns historically. Dividends have accounted for 34% of the market’s returns on average from 1940 to 2023. Particularly, from the mid-1800s to the mid-1900s, these stocks were the primary factors driving stock returns along with earnings growth. Warren Buffett recognized the value of dividend growth stocks. In August 1994, his company acquired 400 million shares of Coca-Cola, valued at $1.3 billion. Initially receiving a $75 million cash dividend from Coca-Cola in 1994, this amount increased significantly to $704 million by 2022. Buffett foresaw the compounding benefits of his initial investment in Coca-Cola, understanding how dividends would enhance returns over time. He once said:

“By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings [the dividends paid] exceed 100% of what we paid for the business.”

ALSO READ: Warren Buffett’s 8 Best Dividend Stock Picks

Dividend growth stocks have been hitting on all cylinders over the years. The Dividend Aristocrats index, which tracks the performance of companies with at least 25 consecutive years of dividend growth, has delivered impressive returns in the past, outperforming other asset classes despite fluctuating market conditions. ProShare highlighted the appeal of investing in this index, especially for income investors. The report noted that the index has consistently outperformed the broader market while maintaining lower market volatility since its inception. According to the report, an initial investment of $10,000 in May 2005 could have grown to over $61,000 by March 2023. In addition, the Dividend Aristocrats index surpassed the market in eight of the ten largest quarterly downturns since 2005. Recently, we covered the list of the 25 Best Dividend Aristocrats to Buy according to Street Analysts.

Although dividend growth stocks have delivered strong returns over the years, the challenge lies in maintaining purchasing power against inflation. High Yield Dividend Aristocrats index, tracking companies that have raised their payouts for at least 20 consecutive years, has grown its dividends at a rate that has surpassed inflation over the long term. The index generated an annualized return of 13.86% over the past 15 years, whereas the Consumer Price Index (CPI) returned 2.6% during this period. This shows how important dividend growth is in the grand scheme of things. In this article, we have discussed some of the best dividend kings that have shown solid dividend growth over the decades.

Our Methodology:

For this article, we scanned the list of dividend kings, which are the companies that have raised their payouts for 50 years or more. From that list, we picked 10 companies with the highest 5-year annual average dividend growth rates. The stocks are ranked in ascending order of their annual average dividend growth in the past five years. We also considered hedge fund sentiment around each stock in Insider Monkey’s database, as of the first quarter of 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

American States Water Company (NYSE:AWR)

5-Year Average Annual Dividend Growth Rate: 9.35%

American States Water Company (NYSE:AWR) is a California-based utilities company that specializes in delivering safe, reliable, and sustainable services and products. The company is well-positioned to benefit from its business model. These companies frequently hold a monopoly in their service area, and in return for their exclusive position, they consent to regulation by state utility commissions. When water utility companies expand and upgrade their infrastructure to enhance services for current and new customers, these commissions typically approve rate increases. Consequently, this drives up operating revenue and profits over time.

American States Water Company (NYSE:AWR), one of the best dividend kings, currently offers a quarterly dividend of $0.43 per share. The company is rewarding shareholders with growing dividends for 69 consecutive years. The stock has a dividend yield of $2.44%, as recorded on June 19.

In the first quarter of 2024, American States Water Company (NYSE:AWR) posted revenue of $135.2 million, which fell by over 16% from the same period last year. However, the revenue beat analysts’ estimates by $16.25 million. Over the past decade, the company’s dividend has grown at an annual rate of 7.8%, significantly higher than the utility sector average of 5.2%. The company is also positioned to continue growing its dividend at a high single-digit rate annually in the coming years. This is mainly due to its payout ratio of 57%, which is much lower and more favorable than the 75% payout ratio typically preferred by rating agencies for the industry. American States Water Company (NYSE:AWR) has a forward P/E of 23.09. The company’s expected annual growth rate of 7.3% for the next three years surpasses its 10-year average growth rate of 6.5%. Its P/E ratio reflects investor confidence in the company’s ability to handle market challenges more effectively than most. In the past five years, the company has raised its payouts at an annual average rate of over 9%, which places it on our list of the best dividend kings.

As of the end of Q1 2024, 19 hedge funds in Insider Monkey’s database held stakes in American States Water Company (NYSE:AWR), compared with 21 in the previous quarter. These stakes are worth over $45.8 million in total.

Overall AWR ranks 9th on our list of the best dividend stocks to buy. You can visit 10 Best Dividend Kings to Buy for Safe Dividend Growth to see the other dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of AWR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as AWR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.