3 Dividend Stocks That Will Quench Your Thirst

Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When it's 100 degrees outside and the sun is beating down, an ice-cold beverage might be just what you need to cool you off. On the other hand, a dividend-paying beverage stock might be exactly the thing to heat up your portfolio. Whether you prefer to quaff soda or “pop,” there are choices among income-generating companies that are sure to suit.

I’ve been writing about dividend-paying companies for about a year, designed a ratings system to help me select the best companies, and built my Perfect Dividend Portfolio (PDP) featuring 10 stocks that I believe will perform better than other dividend portfolios.

I look for a combination of an excellent dividend-raising history, high current yield, and superior potential for earnings growth. I also take into account the projected five-year earnings growth rate as well as the current price-to-earnings (PE) ratio and the trailing-12 months’ share-price increase.

In this article I will examine a trio of beverage companies that offer fairly good dividend yields to see if they might be appropriate for your portfolio.

Have a Coke and a smile

Coca-Cola (NYSE: KO)  was recently trading at about $40 per share and yields 2.8%. The company has raised its dividend every year for 51 years; its five-year dividend growth rate (DGR) is a substantial 8.1%, and its payout ratio is a conservative 56%. This leaves plenty of cash for further investments in the company as well as rewarding shareholders.

Coca-Cola's management tends to raise its dividend once a year, in the first quarter, and its 2013 increase was a slightly higher-than-normal 9.8%. In addition, the company announced in late 2012 that it would buyback an additional 500 million shares, worth approximately $20 billion at today's price. This is a significant boost to the share-repurchase strategy the company has been following since 2006, and represents about 11% of the current market cap.

Coca-Cola announced its 2Q earnings on July 16, and the management team said that it was “not happy,” as it reported somewhat disappointing results. Global growth for the quarter was only 1%, and even though earnings per share met the analysts' estimate, net revenue declined by 3%. This made investors unhappy as well, and the stock price was punished a bit, dropping by 2% the following day.

Since then, the stock has continued to decline, and in recent days it stood at 3.7% off the July 15 closing price. This is, in my opinion, a short-term reaction and should not be a cause for undue concern. Coca-Cola is a cash-generating machine.

When you factor in Coca-Cola's $4.6 billion 2012 dividend distribution plus its $3.1 billion in share repurchases, you have a total of $1.73 in cash benefiting shareholders, or a yield on current price of nearly 4.4%.

Take a lesson from Warren Buffett, who has built Coca-Cola into one of his largest holdings at nearly 20% of the total weight of the Berkshire Hathaway portfolio. Long ago he recognized the power of Coca-Cola's dividends, and he has continued to enjoy those distributions for almost 20 years.

Not just for quenching your thirst

Coca-Cola's number-one rival is PepsiCo (NYSE: PEP), although PepsiCo has been working to build its snack-food business in addition to its beverage businesses. Its Frito-Lay division already contributes two-thirds of the company's revenue, and with the beverage business declining, this may ultimately mean that we have to move PepsiCo away from the "consumer products - beverage" category. 

PepsiCo was recently trading at $83 and yields 2.7%; the company has been raising dividends consistently for 41 years. Its five-year projected earnings growth rate is 8.3%, its PE is 19.8, and its payout ratio is 51%.

PepsiCo's last dividend increase was in June when it announced a 5.6% increase, which is just about inline with its annual increases over the past five years.

Second-quarter earnings were announced on July 24, and revenue was up 2% globally. Together with cost-cutting measures, the company was able to increase operating profit by 8%. PepsiCo's results were considered strong and the company beat analyst estimates on EPS by 10%.

Billionaire investor Nelson Peltz has built a 12-million share position in PepsiCo and has recently begun calling for changes. He says the company is "increasingly unmanageable" and that it has "under-performed its peers as it grapples with the differing needs of its fast-growth (snacks) and slow-growth (beverages) and resulting inherent conflict in allocating its resources."

He has a plan to maximize shareholder value by demanding that PepsiCo acquire Mondelez, the snack-food maker that was spun off from Kraft in 2012; he says the resulting combination would be "a leading global snacks company with one of the most valuable brand portfolios in the world."

PepsiCo's dividend metrics are quite similar to those of Coca-Cola, although Coca-Cola's numbers tend to be slightly better. On the other hand, PepsiCo's stock is up 22% year-to-date versus Coca-Cola's under-performing 11%.

Up-and-coming contender

Dr Pepper Snapple (NYSE: DPS) is currently trading at $45 and is another beverage/snack food company that pays a dividend that's worth considering. It yields more than Coca-Cola or PepsiCo, at 3.2%, but it has only been raising its dividend consistently for four years. On the other hand, it's only been in existence for five years, since it was spun-off from Cadbury Schweppes in 2008.

The company's four-year DGR is an extremely respectable 19%, and with a few more years under its belt, this company may start really making some waves among the dividend fandom.

Dr Pepper Snapple is estimated to generate $3.50 per share in discretionary free cash flow in 2013, which works out to nearly an 8% yield on the current price. The management team recognizes that one of the best uses of the funds generated by this cash machine is to demonstrate a clear commitment to returning shareholder value by methodically buying back shares. It has reduced its number of shares outstanding from 254 million in 2009 to 204 million today.

In terms of market share, the company is still ranked a distant third behind Coca-Cola and PepsiCo, but it's gaining market share and still has great opportunity to branch out into beverage markets that it doesn't currently serve, like bottled water and energy drinks.

The stock has not performed well this year, up only 4% year-to-date, and the CEO recently sold a significant amount of shares, but don't let those facts scare you off. Dr Pepper Snapple has the cheapest valuation, with a PE of 14.4, and the highest yield among the three beverage companies. Its shareholder-friendly actions promise a steady and growing income stream.

If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.



Karin Hernandez has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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