Dividend investors are being offered a sparkling deal on Coca-Cola (NYSE: KO) stock these days. The beverage giant’s yield is sitting just above 3% as of this writing, which means you could receive an income of $400 per year by putting about $13,000 to work in the stock.
Of course, you’d want to make an investment like this in the context of a diversified portfolio that includes exposure to many other sectors and business types. But Coke can be a highly positive force in such a portfolio. Let’s look at a few reasons why.
Latest results
Coke’s mid-February earnings report contained plenty of good news for its shareholders. Organic sales were up a robust 12% in the fourth quarter, management said, outpacing rival PepsiCo (NASDAQ: PEP). Coke benefits from its higher proportion of on-the-go beverage sales and its more focused portfolio. It is also helping it right now to not have a large exposure to snack foods as PepsiCo does.
Coke is also finding success with its push into non-traditional beverage categories like energy drinks and sparkling waters. “We’re confident that our all-weather strategy, powerful portfolio, and harmonized system will continue to create value for our stakeholders,” CEO James Quincey said in the Q4 press release. Yet Wall Street has modest expectations for the business. Most analysts project that sales will be flat this year, which helps explain why Coke’s stock is available at a relative discount after having sat out the market’s rally over the past year.
Earnings and profits
Meanwhile, its earnings are expanding quickly, putting shareholders in a great position to patiently hold this stock while they collect passive income. Coke’s operating margin rose to an industry-leading 23% of sales in Q4, helping power an earnings jump of 13% for the year. That 2023 increase rises to a blazing 21% after adjusting for currency exchange rate shifts.
Cash production looks just as strong, with free cash flow again landing at about $10 billion for 2023. This performance allowed management to direct nearly $2 billion toward stock buybacks. But Coke’s bigger priority is clearly its dividend. Coke spent $8 billion on dividend payments in 2023, up from $7.6 billion in 2022. Look for another significant payout boost later in 2024, which will mark Coke’s 62nd consecutive annual hike.
The price is right
You’ll have to pay a bit of a premium for Coca-Cola stock, at least compared to some other consumer staples giants. PepsiCo shares trade at 2.5 times annual sales, less than half of Coke’s valuation.
But Coke is much more profitable, sporting a 28% profit margin compared to Pepsi’s 14%. The company is growing more quickly, too, with both sales volumes and profits rising in the past full year. Pepsi, in contrast, had to rely exclusively on price hikes to keep its overall sales rising.
The good news is that dividend investors can sit back and collect passive income from Coca-Cola while they wait for its stock returns to better match up with its excellent financial metrics. Whether you can put $1,300 or $13,000 to work in this business today, you’ll likely be happy with the over 3% immediate yield. Sure, there are faster-growing stocks available outside of the consumer staples niche. But Coke offers a balance between growth, income, and stability that should be highly attractive for those focused on long-term returns.
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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Want $400 a Year in Passive Income? Invest $13,000 in This Dow Dividend Giant was originally published by The Motley Fool