Why Coca-Cola Could Remain a Dividend Aristocrat for Another Half-Century

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Investors have gravitated to dividend stocks for the income and growth potential they offer. Among the ranks of dividend stocks, Coca-Cola (KO -0.24%) stands out as a member of the elite group of stocks known as the Dividend Aristocrats. Becoming a Dividend Aristocrat requires that a company raise its dividend payouts annually for a quarter of a century, and you'll find only a few dozen stocks among the ranks with Coca-Cola.

Coca-Cola is a staple of American culture; its trademark cursive logo and red-colored can has given the company the most valuable brand in the world label for several years. Yet, recently, Coca-Cola has gone through some struggles, as concerns about the health effects of its sugary carbonated beverages lead some consumers to make other choices in the beverage realm. Investors are still judging whether Coca-Cola will be able to address the threat effectively. Below, we'll take a closer look at Coca-Cola.

Dividend Stats on Coca-Cola

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

Will business concerns reverse Coca-Cola's dividend success?
Investors have benefited greatly from Coca-Cola's generous dividend policies for more than half a century, and the pace of the soft-drink giant's payout growth has remained consistent and strong for a long time. Since 2002, Coca-Cola has generally kept its annual dividend increases in the 10% range, with a brief period following the financial crisis during which time the company slowed its dividend growth to the 7% to 8% range.

KO Dividend data by YCharts.

Yet, one challenge that Coca-Cola faces is where to find future growth. From a geographical perspective, Coca-Cola has done an amazing job in penetrating new markets; but the fact that the company has already established a presence in more than 200 countries across the globe means that it no longer has the low-hanging fruit of undeveloped markets in its future. Instead, Coca-Cola has to work at persuading consumers to buy more of its products, and that requires a longer-term mind-set that won't necessarily give short-term traders the quick results they prefer.

The job of raising demand for Coca-Cola's traditional carbonated products has gotten tougher lately, as health issues have had a negative impact on consumer attitudes. On one hand, some have presented evidence establishing links between sugary drinks and obesity and related ailments. Yet, even in the diet-drink realm, sales volumes have dropped sharply, as recent studies have linked artificial sweeteners to issues like kidney problems and diabetes. Coca-Cola and rival PepsiCo (PEP -0.68%) are both working hard at finding new sweeteners that avoid these problems, but it could still take time to reverse customer wariness.

In response, Coca-Cola has made strategic acquisitions of substantial stakes in beverage companies outside its core competence. With double-digit percentage stakes in both coffee giant Keurig Green Mountain (GMCR.DL) and energy-drink pioneer Monster Beverage (MNST -1.64%), Coca-Cola has recognized the value of different segments of the beverage business, and it believes that it can take advantage of the efficiencies of the Coca-Cola distribution network to squeeze even more profits from these already lucrative businesses. Still, the payoff from these investments could take time to materialize, and investors expect no growth in earnings per share this year, and only minimal gains in 2015.

Coca-Cola has room for dividend growth
Dividend investors can take some solace from the fact that Coca-Cola has the time to let its longer-term strategies play out. With the company paying out just more than 60% of its earnings per share in dividends, Coca-Cola can afford to continue its rate of rising payouts without jeopardizing its ability to allocate the rest of its capital toward growing its business. Moreover, earnings per share have taken a sizable hit from the currency impact of a strong U.S. dollar on Coca-Cola's global business, and if those foreign-exchange trends flatten out or reverse themselves, it could lead to further growth in the future.

Despite its challenges, Coca-Cola isn't likely to stop rewarding shareholders for their patience in sticking with the beverage giant as it considers how to transform itself to find new growth opportunities. With such strong brand recognition, Coca-Cola has the potential to remain a Dividend Aristocrat for the next half-century.