PepsiCo (PEP -0.19%) is one of the world's leading food and beverage companies, with a wide portfolio of well-known brands including Doritos, Lay's, Tostitos, Cap'n Crunch, Quaker Oatmeal, Rice-A-Roni, Aquafina, and Gatorade, in addition to its soft drinks. Investors are attracted to its stock because it is a relatively stable company and its dividends are a reliable source of growing income. Food and beverages are consumer staples, and demand for them tends not to fluctuate much with economic cycles. So PepsiCo's operating results are unlikely to either grow or deteriorate quickly, especially given its diverse product offerings and global scope.
It's also a Dividend Aristocrat with a 47-year streak of raising its payouts annually. At its current share price, its dividend yield sits at 2.84% -- well above than current S&P 500 average of just under 2%. PepsiCo's dividend payout ratio, which measures the percentage of profits being spent on those distributions, sits at 78.3%. While that's somewhat high, it still shows the dividend is more than covered by the company's cash inflows. There's no reason to suspect that PepsiCo's dividend will become unsustainable in the near future.
In short, there are plenty of reasons for income investors to like PepsiCo stock -- but that doesn't mean you can't find superior alternatives. These three stocks share many characteristics with PepsiCo, but pay higher dividends.
Coca-Cola (KO -0.13%) is Pepsi's biggest soft-drink rival. It, too, is a Dividend Aristocrat with a global consumer staples business. In addition to the variety of Coke-branded products, the company also owns brands such as Fanta, Schweppes, Sprite, Dasani, Vitaminwater, Powerade, Minute Maid, and Gold Peak. But unlike PepsiCo, which derives nearly half of its revenues from food sales, Coca-Cola relies on beverages for the vast majority of its sales.
At current share prices, Coca-Cola's dividend yields 3.27%, nearly half a percentage point more than PepsiCo's. There are several reasons for this discrepancy, but they revolve around dividend stability. Coca-Cola's payout ratio is slightly higher at 85%, so it has less room for dividend hikes unless its profits expand. Further, the company's annual sales have been declining in recent years. Analysts are calling for revenue gains next year, but the extra uncertainty around the global economy means such forecasts should be taken with a larger-than-usual grain of salt.
Kellogg (K 1.16%), too, possesses many of the characteristics that make PepsiCo popular. The $21 billion company has a global footprint, and produces a large array of consumables -- its many cereals, plus food brands including Cheez-It, Pringles, Kashi, Eggo, Morningstar Farms, Nutri-Grain, Pop-Tarts, and Gardenburger. For years, it has delivered relatively stable revenues with modest growth, and is expected to keep doing so.
But Kellogg's dividend currently yields 3.89% -- comfortably higher than the iconic beverage company's. The 66% dividend payout ratio seems sustainable at first glance, though Kellogg's dividends have exceeded profits at times in the past several years. The higher yield is probably due to the market recognizing the possibility that Kellogg's dividend growth will stall or that payouts could even be reduced, and discounting the stock accordingly. That perceived risk, though, may offer investors an opportunity to jump on a stable cash flow producer that kicks off more income than Pepsi.
In addition to its iconic namesake brand, Campbell Soup (CPB -0.78%) owns such food lines as Prego, Pace, V8, Pepperidge Farm, Goldfish, Snyder's, Emerald Nuts, and Pop Secret. Like the companies discussed above, this is a large consumer products operation with relatively predictable results and stable cash flows. In other words, it's a solid defensive stock. Though the company's revenue and earnings have risen and fallen in recent years, the overall trend has been toward growth.
At current share prices, Campbell's dividend yields 3.12%, and the company recently bumped up its quarterly distribution by $0.02 per share. Despite that, its payout ratio is still a manageable 58%. Analysts are expecting sales and earnings in 2021 to be essentially the same as they were last year, so income investors can feel fairly confident that Campbell Soup will be able to keep up those payouts.