While the cash flow that comes from investing for income has obvious appeal, there's also an underrated aspect to owning dividend stocks. Psychologically, getting income from investments can help the brain better endure market volatility.
Dividend stocks become the proverbial golden geese that lay golden eggs (i.e., pay dividends) for shareholders every month, quarter, six months, or year. Income investors are also the first to recognize that it makes little sense to panic and sell ownership in a company simply because the stock is doing poorly at any given moment.
For the income investors out there looking for some psychological assurance in these trying economic times, here are two Dividend Kings to consider that have the resources and business models needed to keep boosting their payouts in the years and decades to come.
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1. PepsiCo
PepsiCo (PEP 0.03%) manages hundreds of well-known brands roughly evenly split between food (53%) and beverages (47%). In 2021, at least 23 of these brands generated more than $1 billion each in sales annually. The brands include such well-known names as Doritos, Mountain Dew, Gatorade, Lipton, Quaker foods and snacks, Bubly sparkling water, Cracker Jack, and the eponymous Pepsi. With nearly half (44%) of its $79 billion-plus in net sales being generated outside of the U.S. in 2021, the company is as geographically diversified as it is brand diversified.
Thanks to its brand power, PepsiCo is the undisputed leader in the global convenience-foods market and in second place behind Coca-Cola in the beverage market. PepsiCo controls 8% of the $573 billion global convenient-foods market and 9% of the $579 billion global-beverages market. As the global population and pricing power grow, it's expected that both markets will compound at 4% to 5% annually for the next several years. This bodes well for PepsiCo's future. Analysts forecast PepsiCo's earnings will grow at a compound annual growth rate of 7.9% over the next five years.
PepsiCo joined the ranks of Dividend Kings this year by raising its dividend payout for the 50th straight year. The dividend currently yields 2.64%, a rate meaningfully higher than the S&P 500 index's average yield of 1.6%. It generates enough free cash flow to manage a dividend payout ratio of 64.6%, which hovers right around its 10-year average. That suggests the payout is sustainable and that there is room for more growth.
PepsiCo stock's forward price-to-earnings (P/E) ratio of 26.1 is significantly higher than the consumer staples sector forward P/E ratio of 20.3. But the company's fundamentals and dividend growth track record arguably justify the above-average valuation.
2. Procter & Gamble
Much like PepsiCo, Procter & Gamble's (PG -0.66%) portfolio of brands are recognized around the world and popular sellers. These iconic brands include home-care brands such as Mr. Clean and Swiffer, family-care brands like Luvs and Pampers, and hair-care brands such as Head & Shoulders and Pantene. The company doesn't identify individual brands' revenue totals but it does say it has 25 billion-dollar brands.
The company's extensive product offerings in more than 170 countries helped P&G generate $80.2 billion in net sales in fiscal 2022 (which ended June 30) and $14.8 billion in net earnings. It's the billions in earnings each year that help P&G grow its dividends paid annually for 66 consecutive years.
The dividend growth streak doesn't look like it will end anytime soon for a couple of reasons. First, population growth should contribute to higher demand for the company's products. Analysts are forecasting 4.6% annual earnings growth through the next five years.
Second, P&G dividend payout ratio is a very manageable 59.5% (and well below its 10-year average payout ratio of 75%). This gives the company a large cushion to help it withstand any temporary declines in profitability.
Income investors can buy P&G's stock with its current 2.6% dividend yield at a forward P/E ratio of 23.1. This is hardly an unreasonable valuation for a company with such a sturdy payout to shareholders.
