Did you know that dividends have made up roughly 40% of the stock market's total returns since 1930? Investors can buy dividend stocks for passive income, but don't underestimate their power to create wealth over the long term.
You don't need to take considerable risks to find the next big thing. Instead, consider these top two dividend stocks. These come about as close to buy and forget as you can get.
Quenching the world's thirst
The Coca-Cola Company (KO 0.34%) is a longtime favorite of Warren Buffett, and for good reason -- the stock's been paying and raising its dividend for 60 years. The Dividend King is one of the world's largest beverage companies, and sells more than $41 billion yearly in soda, water, juices, teas, and coffee. The dividend offers a yield of 2.9%, generating solid income for investors.
Coca-Cola's consistent growth and efficient business model are crucial to its success as a dividend stock. First, beverages are a massive and fragmented product category worth an estimated global value of $1.8 trillion. And few can compete with the company's enormous distribution. Coca-Cola-owned products get top-notch shelf space in stores and other points of sale, elbowing out the competition and staying in front of thirsty consumers.
Secondly, the company has become very efficient at converting revenue into cash profits. Coca-Cola doesn't bottle its beverages; it sells concentrated syrups to bottlers and customers. About $0.29 of every revenue dollar ends up as free cash flow. Dividends are a cash expense, so having steady cash streams is key to a consistent dividend.
The dividend itself is also very safe -- Coca-Cola's dividend payout ratio is manageable at 72%. But with $11.6 billion in cash on the balance sheet, Coca-Cola could pay its dividend for more than a year if the business shut down overnight. Management has called for revenue growth averaging between 4% and 6% annually for the long term, so investors looking for a steady compounder could do well with this proven winner.
America's largest retailer
Consumer spending drives the U.S. economy, accounting for nearly 70% of the U.S. gross domestic product. Walmart (WMT -0.87%) plays a big part in that as the largest retailer in America. A Dividend Aristocrat that will soon become a king, Walmart has raised its dividend for 49 years and counting. Investors get a 1.7% dividend yield at the current share price.
But Walmart's business is built entirely differently than Coca-Cola's -- it relies on massive volumes at low-profit margins. Walmart does more than $587 billion in annual revenue, the most of any publicly traded company. According to Walmart, 90% of Americans live within ten miles of a Walmart store. The company sold $219 billion in groceries in its 2022 fiscal year, ending January 31, 2022, pacing far ahead of Kroger, the largest supermarket chain in the United States.
Walmart's massive size also gives it enormous bargaining power with suppliers. Sell a product at Walmart? It is probably your largest customer by a country mile. Walmart's bargaining power helps it secure products at lower prices so that it can sell at lower prices than its competitors. Amazon has emerged as the dominant e-commerce company in America, but Walmart's massive store footprint has helped it remain relevant and continue growing.
Investors shouldn't expect eye-popping growth over the long-term; Walmart has averaged 2.5% annual revenue growth over the past decade. But given the company's massive footprint and the slow and steady nature of inflation and population growth, the company could eke out growth and dividend increases for years to come.