With a recession possibly on the way, investors would be wise to strengthen their portfolios in preparation. And businesses with well-known brands that sell essential products to customers are as close to recession resistant as possible.
Investors in search of companies that pay steadily growing passive income need look no further than McDonald's (MCD -0.05%) and PepsiCo (PEP 3.62%): The two stocks boast nearly a century of consecutive dividend hikes between them. Here's why the consumer staple stocks appear to be great buys for dividend growth investors.
1. McDonald's: A brilliant business model and a worldwide brand
With nearly 40,000 restaurants serving 63 million customers every day in over 80 countries, McDonald's is a truly global brand. Aside from the company's masterful branding and sky-high brand recognition, its business model has made the company a true success.
Approximately 95% of McDonald's restaurants are owned and operated by franchisees. This means that independent business owners put up their own capital and pay the company a percentage of revenue for the privilege of using its name and brand. That helps the company grow quickly, with minimal capital expenditure on its part. Along with a thriving McDonald's rewards program with more than 25 million active customers in the U.S., this is why analysts are expecting 6.7% annual earnings growth through the next five years.
And shares of McDonald's are currently sporting a 2.3% dividend yield. For context, this is meaningfully above the S&P 500 index's 1.7% yield. Pairing the affordability of the company's dollar menu with a dividend payout ratio that is projected to be approximately 57% in 2022, McDonald's should build upon its 45-year dividend growth streak in the future.
The cherry on top is that McDonald's forward price-to-earnings (P/E) ratio of 25.4 is only slightly higher than the restaurant industry's average forward P/E ratio of 24.3. Given the company's status as a world-class business, this is hardly an unreasonable premium. That's probably why analysts anticipate 9% upside over the next 12 months from the current $266 share price.
2. PepsiCo: A titan of the consumer staple sector
PepsiCo boasts numerous billion-dollar brands within its convenient foods and beverages portfolio. These include the likes of Quaker Oats, Cheetos, Bubly sparkling water, and the SodaStream carbonated beverage maker. PepsiCo's products are consumed by people more than 1 billion times a day, in just about every country and territory on the face of the earth.
As the company launches new products and completes new acquisitions, revenue and earnings should continue to churn higher: Analysts believe that PepsiCo's earnings will compound at 8.2% each year over the next five years.
Coupled with a dividend payout ratio that will be around 65.6% in 2022, the company should easily be able to extend its 49-year dividend growth streak moving forward. Combining the market-topping 2.5% dividend yield with high-single-digit annual dividend growth potential makes PepsiCo an enticing dividend growth stock.
The stock's forward P/E ratio of 25.1 is just below the nonalcoholic beverage industry's average forward P/E ratio of 26.2. This is why analysts have a 12-month price target of $188, which is a 3% upside over its current $183 share price. That makes PepsiCo a defensive pick to consider buying for 2023 and beyond.
