Investing in dividend stocks can be an excellent way to generate passive income. Companies with a long history of paying dividends can often be relied on to continue the stream of payments. If they have paid a dividend for decades, chances are they place a high priority on maintaining a dividend payment. 

Procter & Gamble (NYSE:PG) and Coca-Cola (NYSE:KO) are two such businesses. Each has paid a dividend for decades and has the potential to continue for decades more. Let's compare these two giants to determine which is a better dividend stock. 

Two people drinking soda.

Image source: Getty Images.

Coca-Cola

Coca-Cola has been quenching people's thirst for nearly a century. The company manufactures and sells its drinks worldwide with an emphasis on away-from-home locations like restaurants, movie theaters, and theme parks. The strategy had an adverse impact during the coronavirus pandemic but is now a tailwind as economies have reopened

Coca-Cola pays a dividend of $0.42 per share every quarter, which is good enough for a dividend yield of 3.07%. In recent years, the company's dividend payout ratio, which is the part of earnings paid out as dividends, has increased to over 100%. Notably, a dividend payout ratio over 100% is unsustainable in the long run because eventually, the business will run out of cash. 

Procter & Gamble 

Procter & Gamble is synonymous with household products, like laundry soap, shaving products, and paper towels. The everyday use of its products makes the company somewhat immune to boom and bust cycles. Whether an economy is in an expansion or recession, people need to shave and do laundry. 

Procter & Gamble pays a quarterly dividend of $0.87 per share and has paid a dividend for 131 straight years. The company boasts a dividend yield of 2.41%. Although P&G's dividend yield is lower than Coca-Cola's, it is more sustainable in the long run. Procter & Gamble's dividend payout ratio was 59.5% in its fiscal 2021. 

The coronavirus pandemic has caused supply chain disruptions worldwide that are creating shortages of materials and labor. Management estimates the effects will cost $2.3 billion in fiscal 2022. The company is raising prices on its portfolio of products to help mitigate the impact.

The better dividend stock 

Coca-Cola and Proctor & Gamble are both excellent businesses. Additionally, they were each impacted by the coronavirus pandemic uniquely. Procter & Gamble experienced a boost in sales as people spent more time at home and had more occasions to use its products. Meanwhile, Coca-Cola was adversely affected as people were cautious about eating at restaurants and going to the movies, where its beverages are consumed. 

Looking forward, Coca-Cola is in a better position to benefit as people start leaving their homes more often and venturing outside. The same trend is likely to hurt Procter & Gamble as less time at home means fewer occasions to use its products. 

A chart comparing Coca-Cola and Procter & Gamble on valuation metrics.

Data by YCharts.

Further comparing the two stocks on valuation provides no clear winner as the more favorably priced company (see chart). Therefore, it comes down to the sustainability of the current dividend. Procter & Gamble has a far lower dividend payout ratio, making its dividend more sustainable in the long run. It's a close contest, but Procter & Gamble is the better dividend stock

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.