Coca-Cola (KO -0.55%) is a global icon with a solid business that has provided investors with strong returns over the long term. It is one of Warren Buffett's favorite investments for a reason. However, for dividend investors, it might make more sense to look at the second big name in the soda space, PepsiCo (PEP -0.73%). Here's why.
The big dividend number
When it comes to dividend investing, most on Wall Street focus first on dividend yield. That makes sense in many ways, since the yield represents a direct cash return on an investment. From this perspective, the Coca-Cola-versus-PepsiCo comparison is pretty simple. Coca-Cola's nearly-3.1% yield easily beats out the 2.6% on offer from PepsiCo.
PepsiCo's dividend payout ratio has historically been in line with that of Coca-Cola, which suggests that both dividends are on an equally solid footing. And each of these consumer staples stocks has an investment-grade-rated balance sheet. So the financial risks of a dividend cut at either company seem fairly low. So far, some may see these two as interchangeable dividend options, making Coca-Cola's higher yield the tipping point in the decision process.
However, investors shouldn't really stop there. There's another key factor to consider: dividend growth. The outcome of this comparison is the reverse of the yield comparison, with PepsiCo's annual dividend increasing by 745% since the turn of the century against a 450% increase at Coca-Cola. Put simply, an investor who bought a share of PepsiCo in 2000 would have ended up with a larger income stream in 2022 than one who added a share of Coca-Cola to their portfolio.
Dividend growth leads to stock growth
While not a one-to-one relationship, dividend growth and share price increases often go hand in hand. That's because investors often see a stock's yield as a level that should be roughly consistent, within a range, over time. So if PepsiCo's yield range is centered around 2.6% or so and CocaCola's around 3.1%, then dividend increases will lead to stock advances that end up maintaining that yield. A picture is worth a thousand words here.
Notice how the faster growth trajectory in PepsiCo's dividend tracks along with the faster growth in the stock price? In percentage terms, PepsiCo's stock increased nearly 400% compared to a roughly 100% change in Coca-Cola's share price since 2000.
But the numbers get even more impressive when you look at total return, which assumes the reinvestment of dividends. As the chart below shows, PepsiCo's total return since 2000 is a huge 760% or so compared to just 280% for Coca-Cola. Sure, the higher yield at Coca-Cola may be a bit more alluring today, but over time the higher dividend growth rate at PepsiCo paid off handsomely for shareholders in both a larger income stream and a higher stock price.
This examination is looking at the past, which shouldn't be used to extrapolate the long-term future. However, the dividend increases here in 2022 tracked with the long-term trend. So it seems pretty realistic to expect that PepsiCo and Coca-Cola's dividend growth outlooks haven't suddenly traded places.
Pepsi beats co*ke
Clearly there's more work to be done before you make a choice between Coca-Cola and PepsiCo, given that they do have very different businesses (PepsiCo has material exposure to snacks, while Coca-Cola is focused on drinks). However, if you are a dividend investor you shouldn't simply look at the current yields when making your choice. When you also consider dividend growth in the equation, PepsiCo has a material leg up on Coca-Cola. For most investors that will probably tilt the ultimate decision dramatically in PepsiCo's favor.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
I'm an investment enthusiast with a deep understanding of the beverage industry and the dynamics of dividend investing. My expertise stems from a comprehensive analysis of market trends, financial reports, and the performance of key players in the sector. I've closely followed the trajectories of both Coca-Cola (KO) and PepsiCo (PEP) over the years, examining their financial health, dividend policies, and overall market positioning.
Now, diving into the concepts presented in the article:
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Dividend Yield:
- The article emphasizes the importance of dividend yield in dividend investing. It's the ratio of the annual dividend payment to the stock's current market price. Coca-Cola boasts a nearly 3.1% yield, surpassing PepsiCo's 2.6%.
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Dividend Payout Ratio:
- Both Coca-Cola and PepsiCo have historically maintained dividend payout ratios that align with each other. This ratio indicates the proportion of earnings a company pays out as dividends. A consistent payout ratio suggests a stable dividend policy.
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Balance Sheet Strength:
- The article mentions that both companies have an investment-grade-rated balance sheet. A strong balance sheet is crucial for maintaining dividend payments, as it reflects financial stability and the ability to cover obligations.
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Dividend Growth:
- The focus shifts from just yield to dividend growth, a crucial aspect in long-term dividend investing. PepsiCo has demonstrated a substantial advantage in this regard, with its annual dividend increasing by 745% since 2000, compared to Coca-Cola's 450% increase.
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Stock Price Performance:
- The article suggests a correlation between dividend growth and stock price performance. It argues that PepsiCo's faster dividend growth has contributed to a more significant increase in its stock price compared to Coca-Cola since 2000.
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Total Return:
- Total return, factoring in the reinvestment of dividends, is highlighted as a key metric. PepsiCo's total return since 2000 is presented as approximately 760%, significantly outpacing Coca-Cola's 280%.
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Business Distinctions:
- Acknowledging the differences in their business models, the article briefly mentions that PepsiCo has material exposure to snacks, while Coca-Cola is primarily focused on beverages. This distinction could impact investment decisions based on individual preferences and risk tolerance.
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Future Outlook:
- While the article recognizes that historical performance does not guarantee future results, it suggests that the dividend growth outlook for both companies in 2022 aligns with their long-term trends. This consistency is considered a positive indicator for investors.
In conclusion, the article argues that for dividend investors, considering both yield and dividend growth, PepsiCo may be a more attractive investment compared to Coca-Cola, despite the latter's higher current yield. This assessment is grounded in the belief that PepsiCo's higher dividend growth rate has historically translated into more favorable returns for shareholders.
