Many investors seek passive income from dividends as a way to earn money from their investments. While tempting, the challenge with dividends is that they are never guaranteed payments. That makes it risky to rely on dividends as a source of money to cover your immediate costs. One approach to attempt to mitigate that risk is to focus only on companies with long-term track records of dividend hikes. After all, if a company has built such a track record, then it likely has both a business model that supports such a thing and a management team interested in continuing it.
Some companies, known as Dividend Kings, have a 50-year or longer track record of dividend increases. Three investors sifted through those Dividend Kings to see if there are any that look capable of continuing that trend for many years to come. They picked PepsiCo (PEP 0.27%), Genuine Parts (GPC 1.95%), and Coca-Cola (KO -0.12%). Read on to find out why and decide for yourself whether any or all of them may deserve a place in your income-focused portfolio.
A company that sells go-to snacks and beverages
Eric Volkman (PepsiCo): The future is highly uncertain, but it's very likely people will never tire of eating snacks and quaffing soft drinks. So veteran companies that can provide these items are likely going to do well, barring any unforeseen catastrophes.
That's a core reason to like the recently crowned Dividend King PepsiCo. In many ways PepsiCo is just as disciplined and well managed as its archrival Coca-Cola, and has the long string of bottom-line profits and heavy cash flow to prove it.
The trailing three years tell the tale: Across that stretch, PepsiCo's top line has expanded from just over $67 billion to more than $79 billion. Both net income and free cash flow (FCF) were far in the black, with the former ranging from $7.1 billion to more than $7.6 billion, and the latter ramping up dramatically from $5.4 billion in 2019 to just under $7 billion a scant two years later.
Effectively selling drinks and snacks is more a function of marketing and store shelf placement than anything else. One great strength of PepsiCo is that its well-established brands -- Lay's potato chips, Gatorade, Doritos, Quaker Oats, etc. -- are already in-demand standards in supermarkets and grocery stores. It's really just a matter of maintaining brand awareness, which isn't particularly resource-draining.
With that kind of FCF, you can see how the company eventually earned its throne among these elite dividend-paying stocks. The 2021 figure of nearly $7 billion was notably more than the barely over $5.8 billion the company spent on shareholder payouts. That dynamic is typical for PepsiCo.
There will almost certainly be more where that came from. Many pundits are expecting the economy to encounter some hiccups in the near future, to put it gently. PepsiCo is a defensive play in such an environment, as people reach for cheap comfort food (and drinks) in times of distress. Commensurately, analysts are predicting fairly robust revenue and per-share earnings growth for the company both this year and next.
A business that's designed to do well even in tough economic times
Chuck Saletta (Genuine Parts): Even if the shortage of new cars gets better soon, chances remain strong that Genuine Parts' business will remain strong for a long time to come. This is because between tighter emissions rules, higher safety requirements, and more electrification, the cost of new cars is likely to continue rising over time.
That is a long-term tailwind for car parts purveyor Genuine Parts, since the more expensive new cars are, the more likely it is people will try to keep their older vehicles going. Parts break down as older cars age, and a longer lifespan of existing cars translates directly to a sustained business for those whose job it is to supply the parts to keep those vehicles going.
In addition to that structural help, a key reason that Genuine Parts has earned a spot among the rarefied Dividend Kings is that its business tends to do well even in tough economic times. After all, if cash is tight, you're more likely to try to figure out how limp along in your existing car than spend what likely amounts to tens of thousands of dollars on a new one.
That economic reality is behind why Genuine Parts was able to mark its 66th consecutive year of dividend increases with a whopping 10% boost to that payment earlier in 2022. It's also what makes Genuine Parts a Dividend King that could potentially pay you for the rest of your life.
Millions of people have developed the habit of drinking Coca-Cola products
Parkev Tatevosian (Coca-Cola): When I consider a dividend stock that will pay me for life, I want to find a company that sells a product or service that is deeply entrenched. One that fits that mold ideally is Coca-Cola. Its long history of paying dividends qualifies it as a Dividend King. Underlying its ability to pay a dividend is its portfolio of beverages consumers have loved for decades. That's critical because it makes it less likely that the company will ever become obsolete.
Coca-Cola increased its dividend per share from $1.02 in 2012 to $1.68 in 2021. As an added benefit, Coca-Cola is likely not just to pay dividends for a very long time but also to increase that dividend per share in the future. Many folks have grown accustomed to having one or several of Coca-Cola's products daily, which gives the company the power to increase prices without losing too many customers. That feature has become more critical during the current inflationary environment, where businesses must implement price increases to protect profit margins.
Investors can be encouraged by Coca-Cola's ability to generate profits, given its robust margins. From 2012 to 2021, Coca-Cola's operating profit margin expanded from 22.4% to 28.6%. Even if inflation, or other forces, bite into those margins, the company has a healthy range of safety. For those reasons, investors looking for a stock that could pay them dividends for life can feel good about Coca-Cola.
Make today the day you start building your long-term portfolio
While the future is never certain, companies like PepsiCo, Genuine Parts, and Coca-Cola all have built half-century-long track records of paying their investors more money, year over year, no matter what the overall economy has done. That track record certainly makes them Dividend Kings worthy of your consideration.
Whether or not any of them fit in your portfolio is your personal decision, but remember that with any dividend-paying stock, you need to own it before its ex-dividend date to receive its next dividend. So make today the day you start seeking out your long-term portfolio, and maximize the time you'll be able to put those dividend payments to work for you.