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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.
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 ) .
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.
Payout Ratio From Earnings
Payout Ratio From FCF
|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.
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.
|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.
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.
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