The stock market is that rare place where demand for something often falls as the price goes down. Wall Street tends to favor stocks whose prices are soaring while avoiding businesses with flat or declining share prices.
That trend can work in your favor if you're willing to bet against the prevailing sentiment while shopping for quality businesses. But it's even more powerful when it comes to income investments because dividend yields move in the opposite direction of stock prices.
PepsiCo recently closed out a fantastic fiscal 2020. Despite massive disruptions during the early phases of the pandemic, sales grew at about the same blockbuster pace that the food and beverage giant managed in the previous year. Pepsi won market share in its booming snack food division while also outperforming Coca-Cola in global drink sales.
Wall Street has pushed the stock lower in recent months anyway, mainly because Pepsi is predicting a period of elevated spending ahead that might temporarily pressure earnings while reducing stock buybacks. On the other hand, that stock price slump has made it cheaper, valued at 2.6 times sales today.
That metric stood at 3 for most of the last year. Peer McCormick (MKC -0.16%), which grew at about the same pace as Pepsi in 2020, is valued at roughly 4 times annual sales right now.
PepsiCo also pays a much higher yield than you can get from owning McCormick or almost any other quickly growing consumer staples giant. At over 3%, that payout yield promises to cushion shareholders' returns while they watch this high-performing business continue growing in 2021 with an eye toward improving margins in the years that follow.
Kroger is a leading supermarket chain, having booked over $130 billion in sales in 2020. It competes with the likes of Walmart, Target, and Costco Wholesale, but is more attractive than these peers across several investing metrics.
You can buy Kroger shares for around 0.2 times annual sales, for example, compared to 0.9 times for Target. Sure, Kroger isn't growing as quickly as the discount apparel and home furnishings retailer. But it gained market share this past year, too. The supermarket giant's e-commerce segment is getting more profitable as well and benefiting from the same trends that created an earnings spike for Target in 2020.
Meanwhile, even after factoring in the modest sales decline that's expected in 2021, Kroger is on track to outpace management's long-term target of between 9% and 11% annual total investor returns. That strong performance is partly thanks to a dividend that today yields over 2% compared to Walmart's 1.7% and Target's 1.6%, and partly due to Kroger's ability to gain market share through almost any selling environment.
Wall Street kept both Kroger and PepsiCo out of the stock market rally that started in March of 2020. That's a bonus for income investors since they can own these businesses at a discount today. And, with Kroger's 2% annual yield, or Pepsi's 3% yield, you'll also get an attractive income stream to help pad your long-term returns from here.