The beverage industry has long been fertile ground for dividend investors. Coca-Cola (NYSE:KO) and Pepsi (NASDAQ:PEP) have delivered steadily rising cash payouts and solid total returns to investors for decades. And with each company's stock currently yielding about 3.5%, they remain popular options for income-focused investors.

But which of these dividend stalwarts is the better buy now? Let's find out.

A sign labeled dividends next to a roll of $100 bills.

Image source: Getty Images.

Competitive positioning

Coca-Cola and Pepsi dominate the $200 billion global soft drink and bottled water manufacturing industry. Recently, Coca-Cola has been gaining soda market share, with Coke Zero Sugar and Diet Coke enjoying solid sales gains in the first quarter.

However, overall soda sales have declined steadily for much of the past decade -- a trend that's likely to continue for the foreseeable future. More and more people are turning away from high-sugar drinks, as well as those containing artificial sweeteners, which has dented sales of Coke and Pepsi and their diet versions.

Coca-Cola and Pepsi have diversified their beverage product lineups in response to these trends. They've invested heavily in tea, juice, and bottled water, which has helped offset declines in their core soda businesses.

But Pepsi went a step further. The company has become a powerful force in the snack foods business, with popular brands such as Lays, Doritos, Tostitos, Cheetos, and Quaker Oats, among others.

While many of these snack foods aren't exactly healthy, an increasing amount of Pepsi's products do fit the "better for you" description. For example, Pepsi recently acquired Bare Foods Co, maker of a popular line of natural vegetable- and fruit-based snacks. "For nearly a dozen years, PepsiCo has been committed to Performance with Purpose, our vision of making more nutritious products, while also reducing added sugars, salt, and saturated fat," CEO Indra Nooyi said in a press release announcing the deal. "Bare Snacks fits perfectly within that vision."

Pepsi's snack business provides it with a greater degree of revenue diversification than Coca-Cola, which has remained purely a beverage company. Moreover, snack foods -- particularly healthier options -- represent a large and steadily growing market opportunity. For these reasons, I'd argue that Pepsi has the edge in terms of competitive positioning.

Advantage: Pepsi.

Financial fortitude

Let's now take a look at some key financial metrics to see how Coca-Cola and Pepsi stack up.

Metric

Coca-Cola

Pepsi

Revenue

$33.92 billion

$64.42 billion

Operating income

$9.28 billion

$10.56 billion

Operating cash flow

$7.00 billion

$8.83 billion

Free cash flow

$5.49 billion

$5.79 billion

Dividends paid

$6.32 billion

$4.53 billion

Cash

$21.37 billion

$20.61 billion

Debt

$48.99 billion

$43.53 billion

Data sources: Morningstar, Yahoo! Finance.

Pepsi is the larger business in terms of revenue, with nearly twice as much as Coca-Cola. Yet Coca-Cola is the more profitable business, with an operating margin of greater than 27% over the past year compared to 16.4% for Pepsi. As a result, their operating profits are more similar than you might otherwise expect.

Coca-Cola is also the more capital-light business -- Pepsi's capital expenditures were twice that of Coca-Cola in the past year. As such, Coca-Cola's free cash flow is only about 5% less than that of its larger rival. These two beverage titans also have similar balance sheets.

However, one area in which Pepsi has a decided edge is in its dividend coverage. Pepsi's cash dividend payments to shareholders were well covered by the free cash flow it generated over the past year, while Coca-Cola paid out about $800 million more in dividends than it produced in free cash flow. Coca-Cola expects its cash flow production to improve in the years ahead, so this may not be much of an issue, but it's enough for me to give Pepsi the edge in terms of financial fortitude.

Advantage: Pepsi.

Growth

With demand for soda likely to decline further in the coming years, revenue growth will remain a challenge for both Pepsi and Coca-Cola. Still, Wall Street expects Pepsi to increase its earnings per share at an annualized rate of 7.54% over the next five years, fueled by continued growth in its Frito-Lay snacks business. Meanwhile, Coca-Cola's earnings per share (EPS) are anticipated to rise by 7.23% annually during this same time, driven primarily by price increases and cost cutting.

A 0.3% difference isn't enough for me to give Pepsi much of an edge in terms of projected EPS growth, so I'll call it a draw here.

Advantage: None.

Valuation 

Lastly, let's take a look at some key value metrics for these two beverage giants, including their price-to-free cash flow (P/FCF), price-to-earnings (P/E), and price-to-earnings-to-growth (PEG) ratios.

Metric

Coca-Cola

Pepsi

P/FCF

35.11

28.14

Forward P/E

20.13

18.91

PEG

2.97

2.63

Data source: Yahoo! Finance.

Pepsi's stock is nearly 20% less expensive than Coca-Cola's in terms of price to free cash flow. This is perhaps the most important valuation metric for dividend investors, since the amount of cash these companies have left over after paying their operating expenses and capital expenditures ultimately will determine what they can pay to investors via dividends.

Pepsi's shares are also 6% cheaper on a forward price-to-earnings basis, which is a measure of what investors are paying for each dollar of earnings these businesses are projected to generate in the next year. And it's 11% cheaper on a price-to-earnings-to-growth basis, which takes into account Pepsi's slightly higher expected EPS growth.

Thus, Pepsi's stock is the better bargain.

Advantage: Pepsi.

The better buy is...

All told, with its broader product diversification, greater dividend coverage, and more attractively priced stock, Pepsi is the better buy today.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.