When you're looking for investments that delivery truly passive income, dividend stocks rank near the top of the list. Sure, owning a rental property can give you steady cash flow from tenants. Yet those returns require some level of annual effort, including maintenance and administrative work.
Pick the right dividend stock, on the other hand, and you can simply collect the steadily increasing annual payout over decades. And by automatically reinvesting those dividends, your returns are amplified without any extra effort on your part.
1. PepsiCo is a Dividend King
To find a year in which PepsiCo didn't raise its dividend, you'd have to go back all the way to 1972. That 50-year record of consecutive payout hikes puts the soda and snacks giant in the exclusive club of Dividend Kings. And it's a strong signal to investors that this company won't let them down when it comes to passive income.
Pepsi's latest results illustrate how it has been able to pay investors a growing dividend through economic booms and busts. Organic revenue has jumped 13% in the first half of 2022 even compared to booming results a year ago.
Pepsi is winning market share in attractive categories like energy drinks, sparkling beverages, and snack foods. "Our results are indicative of ... the strength and resilience of our categories, agile supply chain, and go-to-market systems," CEO Ramon Laguarta said in mid-July.
Sure, Pepsi's profit margin has declined due to rising costs and inflation. But the company is still generating higher earnings and producing plenty of cash. Those resources are funding more investments into the business and laying the groundwork for faster growth. They are also supporting Pepsi's plans to deliver as much as $8 billion in cash returns to shareholders in 2022 alone.
2. McDonald's has pricing power
McDonald's stock has been trouncing the market so far in 2022, and for good reason. The fast-food giant set a new profitability record in its last quarterly update, as it turned a whopping 43% of sales into operating profits.
Investors are bracing for potentially worse news on profitability due to accelerating inflation. McDonald's likely had to pay far more for food inputs, labor, and transportation in recent weeks, and those factors could pressure earnings when the chain announces second-quarter results on July 26.
However, few companies are better positioned than the burger giant to capitalize on the current consumer spending environment. Its value and premium offerings allow it cater to a wide range of fast-food fans. And its excellent drive-thru service gives it a valuable competitive advantage at a time when consumers are favoring on-the-go food and drink services.
McDonald's dividend yield today sits at 2.2%, which is slightly lower than the 2.6% that investors could receive by owning PepsiCo stock. Investors need only check the chain's operating cash flow to get a good idea of the prospects for increasing returns ahead, though.
Last year, McDonald's generated over $9 billion in operating cash, and it is likely to set another record in 2022. Continued wins on this metric should help shareholders feel confident that the chain will continue raising its dividend payout, just as it has for the last 46 years.