3 Dividend Stocks for Your 2014 Portfolio

Diageo, Coca-Cola, and Molson Coors look attractive for 2014. Which one should you be buying now?

Jan 4, 2014 at 7:30AM

Like most stocks, Diageo (NYSE:DEO), Coca-Cola (NYSE:KO), and Molson Coors (NYSE:TAP) had a good year in 2013.

Yet the investment thesis for these stocks is stronger at the beginning of 2014 than it was a year ago. Let me explain why these stocks could win in 2014, and I'll also tell you which of the three should be your "first buy" for the new year.

 2014: The Year of the Dividend?
Some investors are wondering if they should sell their stocks now, with the market at record highs.  I've come to realize that market-timing strategies are a complete waste of time. Investors who've tried to "book profits" in the market in 2010, and 2012, ultimately lost out on a huge opportunity. 

So do not sell, just be a bit more defensive. Your best move to start 2014 is to allocate more money to stocks that offer a margin of safety.

High-yielding stocks are preferred, and these stocks fit that bill. Diageo pays a 2.28% yield, Coors has a 2.28% yield as well, and Coca-Cola checks in at 2.74%.

Dividends are always popular, but here's why they make even more sense in 2014:

  1. The markets are at all-time highs. If they "sell off," high yields will go higher as the price drops. This may help protect your high-quality dividend stocks from any steep drops.
  2. The market is less volatile than it was to start 2013. That means that strong corporate earnings may not surprise the market to the upside as much as in 2013. Dividends provide another way to win, beyond capital gains. 
  3. Interest rates are still very low, and may go higher. If they do, the bonds you own may suffer declining values. Dividends offer alternative income. 

Why you should buy these dividend stocks, instead of others
The reason to consider these stocks over other high -ielders comes down to two factors:

  1. The payout ratio. The pay-out ratio, or the percentage of EPS that a company pays out in dividends, should always be under 60%. If it's not, how can we reasonably expect these businesses to reinvest in their companies and grow? Diageo and Coors offer both high yields, and a payout ratio less than 50%. Coca-Cola's annual dividend is a hefty $1.12, but it still keeps its payout ratio less than 60%.
  2. Growth prospects. After all, if a company pays a high dividend, that's nice, but growing cash flows will send the dividend, and stock price, higher in the future. 

Finding growth via "The Illusion of Choice"
With large consumer staples, I look for businesses that have a competitive moat I like to call "the illusion of choice." What this means is that the business owns multiple brands within one space, which protects them against fickle consumer tastes. 

Coca-Cola is probably the best example of this. Competitors, like Dr Pepper Snapple, for instance, rely heavily on sugary carbonated drinks, while Coca-Cola now earns 72% of revenues from "non-Coke" branded drinks. If a consumer chooses Dasani or Sprite, they believe that they've made a "non-Coke" choice, but they haven't really.

Beverage choices are in a constant state of flux, which makes this illusion of choice essential. Coca-Cola now sells many leading "healthy" drink brands that it has acquired through acquisition, such as vitaminwater, smartwater, and Odwalla. So, a more health-conscious consumer is actually a growth opportunity for Coca-Cola, even if they believe they're "boycotting" it. 
 
Diageo is the second best "illusion of choice" business, as it has many brands that "compete" against one another. A customer may be tired of Smirnoff vodka, and leave for Ciroc; either way, Diageo wins. This competitive moat has lead to strong returns on equity (39%), and staggering profit margins north of 60%. It's not enough to just have variety; Diageo has the premium brands that customers love such as Baileys, Captain Morgan, and more.
 
And while Molson Coors may just stick to beer, it's much more diversified than companies like Boston Beer, and that counts. Coors owns its namesake, as well as Miller brands, and Blue Moon, which makes up a huge share of the beer market. 
 
Very few high-quality beverage stocks offer the portfolio diversification that these stocks do. 
 
You first dividend stock for 2014 
It doesn't make sense to buy stocks just for a high dividend. Your goal should always be to buy the best companies in the world. Sadly, very few stocks currently offer a high dividend, with a payout under 60%, and growth potential.

Molson Coors is a great stock, yet it doesn't offer the same returns on equity (north of 20%) that Coke and Diageo do. I think Coca-Cola's "healthy" brands will protect it from declining North America soda consumption, but we need more evidence of that.

Diageo, however, offers tremendous premium brands with very few worries. Alcoholic beverages should do well in any market, and it has outperformed the other two stocks. Diageo seems to offer the best chance for growth and dividends in 2014.
 
All three businesses should be on your shortlist, but I'd consider Diageo first.

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Fool contributor Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Boston Beer, Coca-Cola, Diageo, and Molson Coors Brewing. The Motley Fool owns shares of Boston Beer, and Coca-Cola. 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.

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