My Money Is On This Dividend Stock

Today I'm going to tell you about a dividend stock that, within the next two months, I'll be putting $4,000 of my own money into. I'm so confident that my pick, with reinvested dividends, will outperform the market, that should I sell any shares within the next three years, I'll donate $100 to charity.

With the pain of the latest recession fresh in our minds, and several experts claiming that the next crash is right around the corner, investors have been cozying up to dividend stocks like never before.

My pick today, Coca-Cola (NYSE: KO  ) , should easily weather any storm that comes our way.

New players trying to shake things up
The beverage industry holds great promise for dividend investors -- people will always be thirsty.

Though I would like to think that health-oriented companies like Jamba (Nasdaq: JMBA  ) will be the real winners in the industry over the next three years, it's impossible to ignore history: Soft drinks have been around for decades, and they aren't going anywhere anytime soon. We're addicted to their sweet, carbonated taste.

That's not to say that Jamba won't do well. Consider Hansen Natural (Nasdaq: HANS  ) , maker of Monster Energy drinks. If you would have bought it 10 years ago, you'd be sitting on returns of more than 18,000%. The problem is that for every Hansen, countless others fail.

Pinpointing these home run stocks can be difficult. Our Rule Breakers service thinks it has found the next big winner in the beverage industry with SodaStream (Nasdaq: SODA  ) -- a company which allows you to make your own soda at home.

Whether they are right or not doesn't really interest me right now. Although I consider myself a rule-breaker-esque investor, I think it would be small-f foolish to put my entire retirement portfolio into such speculative stocks.

Industry stalwarts
Instead, I'm interested in putting my money into companies that are so consistent that I need only check up on them once per quarter. There are two dividend-paying companies in the beverage sector that I considered for my portfolio along with Coke: PepsiCo (NYSE: PEP  ) and Dr Pepper Snapple (NYSE: DPS  ) .

Dividend strength
There are lots of ways to measure how healthy a company's dividend is. Below, I've included several metrics.

  • The dividend yields tell us just how much bang we're getting for our buck.
  • Payout ratios (from both earnings and free cash flows) let us know how sustainable a company's dividend is and how much room it has to grow; the lower the ratio, the better.
  • The final stat I've included is the growth rate for the dividend over the past five years -- this is a good indicator as to whether the company will continue to raise its dividend.

Company

Yield

Payout Ratio From Earnings

Payout Ratio From FCF

5-Year CAGR

Coca-Cola 2.9% 34% 66% 9.3%
PepsiCo 3.0% 51% 59% 13.0%
Dr Pepper Snapple 3.2% 43% 16% N/A*

Source: Yahoo! Finance. 
*Dr Pepper Snapple has not had a dividend for all of the past five years.

Looking at these numbers, I wouldn't blame you if you thought I was picking the wrong company to put my money into. Coca-Cola has the lowest yield and the highest payout ratio from free cash flow -- and remember, that free cash flow actually funds a company's dividends.

In fact, looking at these numbers, I'd be hard-pressed not to pick Dr Pepper Snapple as my company of choice. Dividend strength, however, is just one piece of the puzzle.

Financial fortitude
When we're talking about big companies in mature industries, we want to know that our chosen stocks will continue to dominate for years to come. The most important metrics for measuring sustainable financial advantages are gross and net margins.

  • Gross margins let us know how much money each company makes on every can of soda, after taking out the cost of the can and its carbonated contents.
  • Net margins let us know how much money each company keeps from every can of soda sold, after taking out all other costs associated with the company, like marketing and administrative costs, interest, and taxes.

Company

Gross Margin

Net Margin

Coca-Cola 63.0% 31.7%
Pepsi 54.6% 10.0%
Dr Pepper Snapple 59.9% 9.7%

This chart says it all. While Coca-Cola's lead on gross margins is great, its net margins absolutely hit the ball out of the park. Basically, Coca-Cola gets to keep $0.32 for every dollar it receives. That's the power of the Coke brand, and that's the type of sustainable competitive advantage that I want in my retirement portfolio.

Foolish takeaway
Today marks the first in a series of 10 articles I'll be writing about my retirement portfolio (as a native Wisconsinite, I'm dubbing this the Cheesehead Portfolio). In the coming weeks, I'll be revealing nine other stocks into which I'll be investing $4,000, and vowing not to touch for the next three years. If I break that vow, a charity will benefit to the tune of $100 for every stock sold before the three-year deadline.

If this article piqued your interest in dividend stocks, and you're looking for some other dividend ideas, consider 13 names from a free report from The Motley Fool's expert analysts called "13 High-Yielding Stocks to Buy Today," including one named by a senior retail analyst as "the dividend play of a lifetime." Tens of thousands have requested access to this report, and today I invite you to download it at no cost to you. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

Though Fool contributor Brian Stoffel loves charity, he has no intentions of paying out to them by selling early. He does not own any shares of the companies mentioned yet. He intends to buy $4,000 worth of Coke stock by Aug. 20, 2011.

The Motley Fool owns shares of Coca-Cola and PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo, Hansen Natural, SodaStream International, and Coca-Cola. Motley Fool newsletter services have recommended creating a diagonal call position in 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.


Read/Post Comments (8) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 21, 2011, at 3:35 PM, TimothyVR wrote:

    Coke will still be there, paying dividends and expanding, when the recessions of 2020 and 2025 and 2030, etc., come and go. That is what I am interested in, so Coke is at the top of my list - with reinvested dividends.

  • Report this Comment On June 21, 2011, at 6:18 PM, concealedweaponR wrote:

    lmao youll donate 100$ ????? you got me rolling

  • Report this Comment On June 21, 2011, at 6:42 PM, rlp2451 wrote:

    If they keep .32 of every dollar it takes in, why isn't their dividend much higher?

    Exxon only keeps .11; shouldn't the price of Coke be a lot less than it is?

  • Report this Comment On June 22, 2011, at 1:12 AM, Guitarpack wrote:

    In the next two months you're going to buy approximately 60 to 70 shares of Coca Cola and if you sell any of it in the next three years you'll donate $100 to charity? Hey big spender, that's some really heavy duty research you must of done to take a big risk like that. And if you chicken out in the next three years you'll give a whopping $100 to charity. Am I supposed to see this as a great leap into the unknown to inspire me to follow suit? Is this supposed to represent an incredible committment that shows you put your money where your mouth is? Or does this just represent how safe you feel you must play it so you don't face all kinds of anger from your readers if you're wrong in your choices and so Motley Fool keeps up its percentages of being right. $100 to charity? As if that's the horrible downside of being wrong? Why don't you just give the $100 to charity regardless of what you do?

  • Report this Comment On June 22, 2011, at 5:57 AM, wax wrote:

    What a load of hooey!

    In the case of KO, instead of all the drama just say that the current close of the stock is 38 times the annual dividend payout.

    If you want drama, how about this.

    Had an investor bought the stock at its current close of $66.26, and using the prior year annual dividend payout of $1.75 per diluted share, it would take 38 years for the dividends to reimburse an investor their risk capital.

    Wax

  • Report this Comment On June 22, 2011, at 2:59 PM, mikecart1 wrote:

    To call KO a dividend stock for giving a sorry 2% in dividends is a joke. To think KO will last forever is another joke. The drink industry is so heavily polluted. Empty calories drinks are not in style anymore. Neither are cavity filled teeth. KO was good when there was nothing but Sprite, Pepsi, and Orange Soda, Water, and Milk. Then Koolaid came along. Then energy drinks. Then protein drinks. Then fruit drinks. Then Vitamin drinks. Then Mineral drinks. Then Drink drinks. Then Flavored Water drinks. Then Herbal drinks. Then Fiber drinks.

    KO won't go anywhere for at least another decade. They need to make their dividend 5% or more.

  • Report this Comment On June 22, 2011, at 4:38 PM, chadscards1274 wrote:

    Just a few comments to put some perspective into this article and it's comments. First, Brian thank for you writing the article and detailing why you are putting your money into KO. The only problem I had with the article is comparing margins for KO and PEP is apples and oranges. KO is a beverage brand and while PEP is number 2 in beverages it's Frito-Lay franchise is a different animal so the straight margin comparison is not useful. I believe both companies could be good investments but for different reasons.

    Now for the comments, does everyone realize that Brian doesn't have to pledge to give anything to charity if he sells these stocks? How do we know he isn't already contributing to charity beyond the scope of this article. I think most the readers commenting missed the point. The point of the article is why KO is a worthwhile investment not how much one contributes to charity. Second, Wax remember that stocks are rarely valued based on the number of times the annual dividend payout. Your math is off because of two things, first it assumes the only reason to buy a stock is for the dividend, second it ignores the years and years worth of dividend increases that KO has rewarded investors with over time. While I do think there are better values then KO at about 16 times next years earnings for a 9-10% growth company the future P/E is lower then the recent historical multiple and KO's ability to deliver more and more cash to investors in dividend increases leads to the premium valuation.

  • Report this Comment On June 22, 2011, at 5:59 PM, TMFCheesehead wrote:

    @MHenage-

    Thanks for the comments, and the head's up about FritoLay's.

    @mikecart1-

    As somewhat of a health-nut, I can only hope that you're right about soda. The fact of the matter remains, though, that these drinks are ubiquitous. You also need to consider that Coke owns many non-soda brands, like Nestea, Minute Maid, Powerade, and Vitamin Water (Glaceau). Finally, while soda may be out of favor in the US, that's not necessarily the case abroad

    Brian Stoffel...

    ...who as a former teacher is also convinced our nation's teachers run on Diet Coke.

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