Earning regular dividends can prove satisfying. This is particularly true when the stock market goes down, as it has this year. Since the start of 2022, the S&P 500 has dropped by 11.5%, putting the index in correction territory.
During challenging times, investing in stocks that have raised dividends throughout the years provides regular income for investors and those stocks tend to hold up better. But it's not merely their past success that makes these Dividend Kings good income investments. These stocks also have bright prospects to continue increasing payments even during this high inflationary period.
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Coca-Cola
Coca-Cola (KO 0.68%) continued to raise dividends even though the pandemic hurt its away-from-home business in 2020 as places like restaurants and stadiums shut down to the public. Fortunately, things have opened up and business has improved.
Although the company recently announced that it would suspend operations in Russia, this shouldn't have a major impact on results. That's because management estimates Russia and Ukraine accounted for 1% to 2% of 2021 revenue.
With powerful brands, Coca-Cola showed it has the pricing power to offset cost increases. In the fourth quarter, its revenue rose by 10% to $9.5 billion, driven by higher prices and a better mix, offset somewhat by lower volume and foreign currency translations. But there were six fewer days in this quarter compared to a year ago that shaved 6 percentage points from Coca-Cola's revenue growth.
Although the company's adjusted operating margin contracted by more than 5 percentage points to 22.1%, this was mostly due to higher marketing spending. Fortunately, this seems like money well spent since Coca-Cola's market share continues to grow.
Meanwhile, it continues to generate plenty of free cash flow. Last year, it was $10.9 billion, which enabled it to comfortably pay the $7.3 billion of dividends.
Earlier this year, Coca-Cola raised its quarterly dividend by $0.02 to $0.44, marking 60 straight years of increases. The stock's yield is 3%, more than double the S&P 500's 1.4%.
Procter & Gamble
Procter & Gamble (PG 0.86%) also has an impressive dividend record. That's because it sells basics that people need regardless of their personal economic circumstances. This includes shampoo, razors, pain relief medications, detergent, and diapers.
The company sells these under popular brands like Head & Shoulders, Gillette, Pepto-Bismol, Cascade, and Luvs. Due to their popularity, Procter & Gamble was able to offset some of the cost increases by raising prices. In the fiscal fourth quarter, which ended on Dec. 31, 2021, sales rose by 6% to $21 billion. The increase was driven by both higher volume and prices.
Procter & Gamble wasn't able to completely offset higher commodity and other costs, with the gross margin contracting by 4 percentage points. But the company saved some money on selling, general, and administrative expenses. The company should weather higher costs just fine, and it expects 4% to 5% sales growth for this year and adjusted earnings per share to increase by 3% to 6%.
For the first half of the year, Procter & Gamble's free cash flow was over $8 billion, which was plenty to pay the $4.4 billion of dividends.
Last April, the board of directors raised the quarterly payout by more than $0.07 to about $0.87. This made it 65 straight years with an increase, and I expect the company to announce another hike shortly.The stock yields 2.4%.
The two companies have powerful brands and have shown the ability to pass on some of the cost increases to customers. Certain outlays are rising fast, which makes it hard for them to keep up. But I expect Coca-Cola and Procter & Gamble to recoup these higher costs over time.
With a commitment to increasing dividends and higher-than-market yields, both stocks make the top of my list.
