Most investors love dividend stocks. They're classic, slow-and-steady stocks that look deceptively low on growth, whereas in reality, many of them perform spectacularly over time and outdo high-growth stocks. Just ask Warren Buffett, who loves a good dividend stock and whose holding company, Berkshire Hathaway, has been one of few entities to outperform the market over many years.
Starbucks (SBUX 0.67%), PepsiCo (PEP 3.49%), and Target (TGT -0.20%) are three dividend stocks that have each beaten the market over time, and they're all top choices to buy today.
1. Starbucks: luxury many people can afford
Starbucks is back in growth mode, posting record revenue of $8.7 billion in the first fiscal quarter of 2023 (ended Jan. 1), an 8% year-over-year increase. That was even with stores in China, its second-largest market, being closed for part of the quarter. U.S. comparable-store sales increased 10%, while international comps decreased 13%, and comps in China were down 29%.
Consumers might have curtailed big luxury spending when inflation was rising toward a peak, but a cup of Starbucks coffee, at a few dollars, is a luxury many people will still allow themselves. The company was even able to raise some prices in North American markets to offset increased costs, and earnings per share (EPS) increased 7% over last year to $0.74. Retail spending has actually been on the upswing recently, and that's good news for companies like Starbucks that sell nonessential items.
Starbucks still has an ambitious growth plan. It opened 459 stores in the first quarter, ending the period with more than 36,000, about half in North America. Its goal is to have 45,000 stores in operation by the end of 2025, or to open 3,000 stores annually over the next three years.
In other words, there are plenty of cash-generating opportunities that feed into the fast-growing dividend.
SBUX Dividend data by YCharts.
The dividend yields 1.9% at the current price, and Starbucks is a great choice for investors seeking a high-yielding, stable, and growing dividend.
2. PepsiCo: the varied-revenue-stream model
PepsiCo and Coca-Cola are often considered similar companies, but there's at least one huge difference between them: PepsiCo is much more than beverages. Although the company's name is synonymous with its core beverage brand, PepsiCo has separate snack and breakfast segments that make it a larger company in terms of revenue. In fact, it earned exactly double Coke's revenue in 2022: $86 billion versus $43 billion.
This three-pronged approach protected PepsiCo's business in the early stages of the pandemic, when people stayed home and munched on snacks and cereals, and cushions it in any environment with varied revenue streams that contribute to high sales.
Like Starbucks, PepsiCo successfully raised prices to counter increased costs, and that generated strong growth in the fourth quarter. Sales increased 11%, and organic sales, or sales from existing products, increased 14.6%. Net income was still pressured, but core EPS (from core products) increased 10% over last year to $1.67, and management expects this pressure to continue in 2023. It's guiding for 6% growth in organic revenue and 8% growth in core EPS.
The company can raise prices only so much despite its strong pricing power. But PepsiCo has a resilient operating model, and its strong cash generation should provide years of dividends for shareholders.
PepsiCo is a Dividend King that has raised its dividend annually for the past 51 years. The dividend yields nearly 2% at the current price, and it's as reliable as they come.
3. Target: Getting through this rough period
Target pretty much ruled throughout the beginning of the pandemic, demonstrating almost astonishing growth as a favored essentials retailer. It reinvented itself with a robust omnichannel shopping network and attracted volume with its same-day services and large assortment of competitively priced owned brands.
It's now muddling through the inflationary period with too much inventory and lackluster sales. In the 2022 third quarter (ended Oct. 29), comps increased 2.7% year over year, and EPS declined 49% to $1.54. Management is anticipating further slowing demand and is implementing a three-year cost-savings plan to save $2 billion to $3 billion.
However, Target's core categories continue to perform well, underscoring the business's value to its customers. Like other retailers, Target is currently experiencing a step back after it took five steps forward to meet skyrocketing demand, but its long-term outlook remains vibrant.
Target is another Dividend King, and like PepsiCo, it has also raised its dividend annually for the past 51 years, including a 20% boost in June. Target's dividend yields 2.46% at the current price, and shareholders should expect to enjoy dependable passive income from Target for many years.
