When most investors begin their search for a new income holding, yield is a top-of-mind criterion. And understandably so. More is better.
There’s far more to the matter than just a starting yield, though, particularly for long-term investors. Reliability counts too, as does reliable dividend growth. And whether a stock can deliver that is ultimately a function of the underlying business.
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With that as the backdrop, beverage behemoth Coca-Cola (NYSE: KO) may well be one of the market’s best dividend stocks despite its relatively low forward-looking yield of 2.2%. Here’s why.
The right business model with the best product lineup
You know it best for its namesake drink, although it sells so much more than sodas. Minute Maid juices, Dasani water, Powerade sports drinks, and Gold Peak teas are just some of the other brands in Coca-Cola’s product portfolio. It’s got something for consumers‘ ever-changing tastes.
Coca-Cola may not be quite the company you think it is, though. While at one point it handled much of its own bottling and distribution, the vast majority of its bottling duties are now handled by third-party companies, some of which it spun off. This allows the company to focus on doing what it does best: marketing.
This model also offloads the bulk of the cost-based risk of being in the beverage business onto the bottlers themselves. That’s a big reason Coca-Cola’s earnings have remained relatively steady — and even continued to grow — in the tough inflationary and macroeconomic environment we’ve been in since 2021.
KO EPS Diluted (Quarterly) data by YCharts.
The company’s revenue mostly just reflects sales of concentrated flavor syrups to these bottlers — a business with fewer variable costs.
Perhaps more important to interested income investors, it’s a rock-solid business model that supports continued payouts. Not only has Coca-Cola paid dividends like clockwork for decades now, but it has raised its per-share payments every year for the past 64 years. There’s no end to that streak in sight, either, given the strength of its product portfolio. After all, several of its brands are the leading names in their respective categories.
Maybe, or maybe not exactly right now
Still, there’s at least one reason would-be buyers might want to keep their powder dry for the time being. That’s this ticker’s sizable run-up over the course of the past three years. In step with demand for AI-related stocks, many investors have been simultaneously adding safer names like Coca-Cola to their portfolios, quietly hedging against the technology sector’s uncertainty and steep valuations.
However, these defensive-minded buyers have arguably overshot their target. After a gain of nearly 70% since this time in 2023, Coca-Cola shares now sport a forward-looking dividend yield of only 2.2%. That’s not the worst yield out there. But you can certainly find far better ones, including from companies that are growing their dividend payments at the same pace that Coca-Cola is.
When you’re talking about your true long-term holdings, though, you have to think bigger-picture, recognizing that much will change in the future that you simply can’t foresee. That’s why it’s wise to own stakes in companies that are capable of performing no matter what’s thrown at them. Coca-Cola has been in a simple business for well over a century, and it’s the obvious leader in the space. That’s why it may still be worth stepping into at its current price if you aren’t comfortable holding out for some measure of a pullback.
And for perspective on what’s possible, investing $10,000 in Coca-Cola shares today would generate roughly $220 in dividend income over the year ahead. That’s not a huge amount, but in five years’ time you won’t be worrying too much about whether you got in at its current record high or were able to sneak in at a somewhat better price. Just worry about buying quality. The rest typically takes care of itself.
Should you buy stock in Coca-Cola right now?
Before you buy stock in Coca-Cola, consider this:
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James Brumley has positions in Coca-Cola. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
