Getting paid to own stocks is rewarding any time, but in a market under pressure from rising interest rates, historically high inflation, and a looming recession, it's nice to know you have some downside cushioning.
Passive income investing helps offset any decline in capital appreciation while providing a vote of confidence that a business splitting its profits with shareholders believes its long-term growth story remains intact. It doesn't hurt that dividend-paying stocks also have a 100-year track record of outperforming non-dividend stocks.
Through world wars, recessions, depressions, and global pandemics, there has not been a single decade when income-generating stocks did not produce positive returns even when the broad market S&P 500 index suffered losses. Moreover, stocks that initiated and then raised their payouts over a 40-year period between 1972 and 2012 returned an average of 9.5% annually, versus just 1.6% for non-dividend-paying stocks, according to J.P. Morgan Asset Management data.
It's why in this market in particular, I find Coca-Cola (KO -0.82%) my No. 1 passive income stock to buy. There are a number of reasons why every investor should consider the beverage giant for their portfolio, but here are the top five reasons why I think this blue-chip dividend stock is best.
1. Adapts to consumer sentiment
There has been a secular change in consumer perception of soda over the past few decades that resulted in consumption rates dramatically declining. Coca-Cola initially struggled with the public's view of soda being unhealthy, but subsequently leaned into it and both acquired and launched brands of bottled water, tea, juice, sports drinks, and more to meet consumer tastes.
Soda itself is now more varied, available in smaller sizes, a wider range of flavors, and healthier sweetener options.
2. Sticks to its knitting
Unlike rival PepsiCo (PEP -0.45%), Coca-Cola takes to heart the adage of doing just one thing, but doing it well. It makes beverages and only beverages, and excels because of it, whereas Pepsi also has a snack food division, which has had to simultaneously confront changed consumer sentiment around health concerns.
Although that gives Pepsi more channels to target and introduces some diversification to its business, Coca-Cola is able to de-risk its narrow focus by having a global footprint, offering more than 500 brands and 3,500 beverages in over 200 countries. It dominates the U.S. market with a 45% share, compared to about 25% for Pepsi, but also has the leading share throughout Latin America, eastern and western Europe, Africa, and Asia.
3. Expanding profits
That's helped Coca-Cola produce margins that handily beat the competition. Gross margins of nearly 60% not only exceed Pepsi's 53%, but also far exceed its rival's operating and net margins by around two to one. Indeed, few other beverage makers even come close.
Even during the retail lockdowns imposed during the pandemic, Coca-Cola's margins held up well. Two years on, the beverage giant is expecting to grow earnings per share by 14% to 15% on a currency neutral basis for the full year in 2022.
4. Generates significant excess cash
Coca-Cola is also forecasting full-year free cash flow (FCF) of $10.5 billion, up 20% from the $8.7 billion it produced last year, which itself was up 3% from 2020. It has regularly produced free cash flow (the money left over after Coca-Cola has paid all its bills), which it can then use to invest in its business, pay dividends, and buy back stock, well in excess of its net income. Over the past five years, it has averaged 48% more FCF to net income.
5. Speaking of dividends
Of course, arguably the most compelling reason to buy Coca-Cola stock is its dividend, one it has paid every quarter since 1920 and has raised every year since 1963. That lengthy record makes the soda giant a Dividend King, part of a small, select group of stocks that increased their dividends annually for 50 years or more.
A top stock to buy now
Coca-Cola has not always been the best-performing stock versus the market indexes. Over the past decade, the S&P 500 generated total returns of 221%, compared to 112% by the beverage leader. So far in 2022, though, Coke is performing well, up 3.4% versus an 18.5% decline by the index -- and it's even better over the past 12 months.
Coca-Cola's business has turned around and it continues to grow and expand. It might not always be the fastest-growing stock, but it's a dependable one, and one that pays you well to own it.