With consumer prices rising at the highest rate in 40 years, it's a great time to consider adding dividend stocks to your portfolio. For example, when inflation spiked in the 1970s, dividends contributed 73% of total returns, according to research by Hartford Funds.
Coca-Cola (KO 1.50%), Target (TGT -0.70%), and Kraft Heinz (KHC 1.31%) offer a balance of long-term growth and near-term income from quarterly dividend payments. If you invest an equal amount in each stock, you will earn an average yield of 2.86%, or $2,860 in annual income on a total investment of $100,000. What's more, that income should rise over time as these companies grow sales and increase their dividend.
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Coca-Cola: classic cola, classic dividend stock
Jennifer Saibil (Coca-Cola): Coca-Cola is the largest U.S. beverage company, with nearly $39 billion in 2021 sales. It's more than the iconic red and white label on its bottles, with a portfolio of 200 brands. Coca-Cola had trimmed about half of its portfolio when the pandemic wiped out a good portion of its revenue, mostly from its away-from-home segment.
It's now emerged as a leaner company focusing on its strongest brands. These are what beef up its revenue and allow it to issue its famous dividend, which it didn't suspend even when revenue decreased as much as 28% at the height of the pandemic.
Sales increased 17% year over year for the full year in 2021, and earnings per share increased 26% to $2.25. It completely recovered from earlier declines, reaching above the 2019 numbers.
As big as Coca-Cola is and as much as it's an established and slower-growth business, it's still investing in expansion, acquisitions, and gaining market share. In fact, it says it only has a 14% share of the market in developed countries and a 6% share in developing countries. That leaves a tremendous market opportunity in its hands. Right before the pandemic started, it had achieved a phenomenal 9% year-over-year revenue increase for the full year 2019.
These are top priorities, carefully balanced along with its ironclad commitment to the dividend. On the fourth-quarter conference call, CFO John Murphy said "We don't waver from our ongoing support and objective to continue to grow the dividend."
Coca-Cola is a Dividend King, having raised its dividend for the past 60 years. Its dividend yields 2.93% at the current price. This is a rock-solid dividend investors can count on in any kind of environment.
Target is correctly adapting to changing consumer behavior, a feature that could pay off long term
Parkev Tatevosian (Target): Investors looking to generate income regularly have an excellent choice in Target. The retailer has thrived since the pandemic onset. Management adjusted quickly to changing consumer shopping habits that accelerated in 2020 and 2021. As a result, Target's sales jumped 19.8% in 2021 and 13.3% in 2022, the only two times revenue increased double digits in the last decade.
People want to shop online, yes, but they also want options. Additionally, folks are placing higher importance on fulfillment. Getting the products delivered to your doorstep is not convenient enough anymore; they need to get there fast. For the most impatient shoppers, Target created several same-day fulfillment services. The features are a big hit. Sales through same-day services exploded by 235% in 2020 and 45% on top of that in 2021.
The excellent performance drove Target's earnings per share up 35.8% in its fiscal year ended January 2021 and 63.2% in the fiscal year ended January 2022. That's crucial because dividends are paid out from earnings. A company cannot sustain a dividend payment above its earnings per share. Eventually, it will run out of savings and exhaust its borrowing ability.
In that regard, Target boasts a quarterly dividend of $0.90 per share, which is $3.60 annualized. That's remarkable growth from the $1.32 income investors received from Target in dividends in 2013.
Moreover, because Target is only paying out 22% of earnings as dividends, there is room for the retailer to keep boosting the payout. For those reasons, if you're an investor looking for passive income, Target is a great place to start.
Cheese and ketchup won't go obsolete
John Ballard (Kraft Heinz): Warren Buffett's Berkshire Hathaway owns 26% of Kraft Heinz, and I believe now could be a great time to consider piggybacking on the greatest investor of our time. Kraft generates $26 billion in annual sales across incredibly strong brands like Velveeta, Philadelphia, Oscar Meyer, and the famous H.J. Heinz ketchup brand. The profit from selling these brands finances a tasty dividend yield of 4.2%, which can provide investors a buffer against higher consumer prices.
Kraft Heinz went through a rough period prior to the pandemic when it had to cut the dividend on top of weak sales growth. But the company hired a new CEO in 2019 to turn things around. Over the last two years, organic sales growth has significantly improved from a decline of 2.2% in 2019 to an increase of 1.8% in 2021. Adjusted earnings per share also grew last year, despite higher costs for raw materials.
Those growth rates might not seem exciting, but the stock trades at a very cheap price-to-free cash flow ratio of 10.5. If Kraft Heinz delivers on its long-term target for sustainable single-digit organic sales and earnings growth, the stock could trade at a higher multiple of free cash flow and deliver attractive upside to shareholders.
Most importantly, the company paid out less than half of its free cash flow last year in dividends. So, it can easily sustain the high-dividend yield even if the company experiences pressure from inflationary food costs in the near term. This makes Kraft Heinz a great dividend stock to buy in 2022, and with management's focus on improving top-line growth over the long term, investors could realize significant capital gains on their investment once this period of high inflation is over.
