The dividend stocks you choose should have good growth potential and the ability to increase their dividends over time. Ideally, they should be among the top companies in terms of paying generous dividends and increasing them year after year. Coca-Cola (KO) is a good example of this.
Coca-Cola is still maintaining impressive sales growth, even as its competitors struggle to expand. Coca-Cola’s internal sales grew 12% in fiscal 2023, compared to strong growth the year before. Meanwhile, PepsiCo ’s beverage business only grew 7% in the same period. It’s clear that Coca-Cola is currently the clear winner.
Coca-Cola’s success comes from its market leadership, its focus on on-premises beverages, and its superior operational efficiency. It also has many opportunities to expand into areas beyond its traditional carbonated soft drinks.
Coca-Cola is a leader in segments such as energy drinks, tea, water and alcoholic beverages. Although it has a large share of the global beverage market, Coca-Cola still has a lot of room to improve this number in the coming years and decades.
Coca-Cola’s ability to pay its dividend is underpinned by its strong financial position. Free cash flow improved to $9.7 billion last year, up from $9.5 billion in 2022. Management expects to spend a little more in 2024, bringing cash flow down to about $9.2 billion. That’s still well above the $8 billion in dividends the company paid out over the past 12 months.
Earnings trends are also very positive. Thanks to price increases and increased sales volumes, Coca-Cola has raised its profit margin to 29.1% of revenue in 2023, up from 28.7% in 2022. That’s double PepsiCo’s profit margin. That means dividend investors can expect their payouts to continue to rise in the coming years, as they have done for the past 60 years.
Coca-Cola shares trade at 5.8 times earnings, double that of PepsiCo. However, the price-to-earnings (P/S) ratio has been as high as 7 times over the past five years. Coca-Cola shares have become cheaper as Wall Street investors have shifted their focus to high-growth stocks in the technology sector.
Dividend-oriented investors have taken advantage of this short-term sentiment shift to invest in this stellar business. Indeed, Coca-Cola is forecasting revenue growth to slow to 6-7% this year, and earnings may only increase by about 5%.
Still, that steady growth in both metrics is what shareholders have come to expect from the leading beverage company. Some years will see unusually strong growth, while others will be more modest. But throughout, Coca-Cola tends to have little trouble capitalizing on its enormous competitive advantage.
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