Today we continue with our special 6-part report from Ben Reynolds, editor of Sure Dividend — a weekly countdown of the Dividend Kings, an elite group of 24 stocks with 50 or more consecutive years of dividend increases.

If you missed Part 1 of this series you can read it here.

If you missed Part 2 of this series you can read it here.

Farmers & Merchants Bancorp (FMCB)

Farmers & Merchants Bancorp is a small regional bank that operates 25 branches across the Central Valley and East Bay areas of California. The company operates as a full-service community bank, providing products like checking accounts, consumer loans, and corporate lending packages. Farmers & Merchants Bancorp was founded in 1916 and has increased its dividend for 52 consecutive years.

What stands out about Farmers & Merchants Bancorp is its illiquidity. The company has a market capitalization of less than $600 million and shares rarely trade hands. The company is one of the smallest Dividend Kings. Indeed, the average trading day in 2017 saw just 31 shares of Farmers & Merchants Bancorp be traded. Moreover, there were 80 days in the year during which no shares were traded.

Still, there are a number of reasons why investors might choose to invest in Farmers & Merchants Bancorp. One large trend is rising interest rates. The Federal Reserve’s March rate hike was the sixth such increase since 2015, marking an end to the era of rock-bottom interest rates that began during the last recession. Importantly, the Fed had previously signaled that it plans to hike rates 3 times during 2018. More rate hikes are highly likely.

This is beneficial for lenders like Farmers & Merchants Bancorp. Rising interest rates allows them to increase their interest rates on their loans while keeping their deposit rates fixed or growing deposit rates more slowly. This differential results in a widening of their net interest margin – creating more profits for the company and, by extension, its shareholders.

For investors looking to capture the benefits of rising interest rates, Farmers & Merchants Bancorp may be appealing. We caution that the company is far less liquid than the typical quality dividend growth investment.

Johnson & Johnson (JNJ)

Johnson & Johnson is the world’s largest healthcare corporation. The company has a market capitalization in excess of $300 billion and generates annual revenue of more than $70 billion. Johnson & Johnson operates in more than 60 countries around the world and employs approximately 131,000 people. The healthcare conglomerate has increased its dividend for 55 years in a row.

The most outstanding characteristic of an investment in Johnson & Johnson is the company’s remarkable stability. The company is one of only two publicly-traded companies to earn an AAA credit rating from Standard & Poor’s, with the other being Microsoft (MSFT). In addition, 2017 marked the 34th consecutive year of operational earnings-per-share growth. This is a track record that, to our knowledge, is unmatched in the public markets.

The combination of a AAA credit rating, 30+ years of rising EPS and 50+ years of rising dividends, low stock price volatility, and global scale make Johnson & Johnson one of the safest stocks to own and hold anywhere in the market.  The company’s safety is closer to that of a utility than to most other healthcare stocks.

Looking ahead, the company’s outlook remains bright. Johnson & Johnson’s size allows it to aggressively invest in research & development while also pursuing growth through acquisitions.

As an example, Johnson & Johnson recently completed the sizeable $30 billion acquisition of Swiss pharmaceutical company Actelion Ltd. The all-cash transaction should be a meaningful driver of growth for Johnson & Johnson’s large Pharmaceutical division over the next several years.

To summarize, we believe that Johnson & Johnson is appealing for conservative investors that are looking for a stable blue-chip company to hold for the long run.

Lancaster Colony Corporation (LANC)

Lancaster Colony Corporation was originally founded in 1961 as the result of the merger of several glass and houseware manufacturing businesses. Just two years later, the company paid its first dividend – and has been increasing it ever since.

Eight years later, Lancaster Colony acquired its first specialty foods business, the T. Marzetti Company. Today’s Lancaster Colony operates as a consumer packaged goods conglomerate that somehow flies under the radar of most self-directed investors. Remarkably, the company has increased its dividend for 55 consecutive years.

Lancaster Colony’s competitive advantage is its brand strength. Lancaster Colony has the number one market share position in its six primary food categories. In addition, the company is quite recession-resistant. While earnings fell by 20% during the 2007-2009 financial crisis, they rebounded to new highs in the subsequent fiscal year.

Looking ahead, the future appears bright for Lancaster Colony. The company has struck partnerships with major consumer brands like Weight Watchers, Jack Daniel’s, Buffalo Wild Wings, and Olive Garden to license their trademarks and manufacture products for the shelves of grocery stores.

With that said, one potential risk for Lancaster Colony shareholders is the company’s concentration in two major sales channels: Wal-Mart (WMT) and McLane. These two distribution channels represented 17% and 16% of sales in 2017, respectively, and carry meaningful accounts receivable balances.

Elsewhere, Lancaster Colony has struggled to adapt to the changing tastes of today’s consumers. Like many other publicly-traded food companies, Lancaster Colony has combated this trend by implementing a series of cost savings measures. While these should help to offset the company’s revenue issues, we’d prefer to see the company return to meaningful revenue growth.

Lancaster Colony should not be seen as a growth stock. The company’s earnings-per-share have grown in the low single-digits over the last several years. Still, the company’s remarkable history of dividend increases makes it an intriguing investment opportunity for investors looking to generate rising dividend income over time.

Lowe’s Companies, Inc. (LOW)

Lowe’s was founded in 1946 and has grown to be the second-largest home improvement retailer in the United States behind Home Depot (HD). The company generates approximately $65 billion in annual sales and operates more than 2,100 stores in the United States, Canada, and Mexico. Lowe’s has increased its dividend for 55 consecutive years, qualifying the company to be a member of the Dividend Kings.

Lowe’s performance over the last decade or so has been nothing short of amazing. Unfortunately, a leadership change has created some uncertainty around the stock. The company announced in late March that Robert Niblock, the company’s Chief Executive Officer of 13 years, is retiring. Under Niblock’s leadership, Lowe’s per-share dividends have grown more than 10x. Niblock is being replaced by Marvin Ellison.  Ellison has been the CEO of J.C. Penny (JCP) since 2015 and also spent more than 12 years at Home Depot.

With that said, we believe the company should still deliver satisfactory growth over the long run. Lowe’s is concentrated in the United States, which provides a tremendous opportunity for it to expand its proven business model to international markets. In addition, Lowe’s has a powerful scale-based competitive advantage that allows it to pressure suppliers into providing better prices. Lowe’s size also allows it to spend more (in absolute terms) on advertising to strengthen its brand versus smaller competitors.

There’s a lot to like about Lowe’s. With that said, investors should recognize that the company is quite cyclical. Lowe’s depends on a healthy and growing housing market to generate sales. Accordingly, the company’s performance tends to deteriorate significantly during recessions – which are typically excellent buying opportunities for this high-quality dividend growth stock.

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