Coca-Cola (KO 1.50%) is a global icon with a solid business that has provided investors with strong returns over the long term. It is one of Warren Buffett's favorite investments for a reason. However, for dividend investors, it might make more sense to look at the second big name in the soda space, PepsiCo (PEP 3.62%). Here's why.
The big dividend number
When it comes to dividend investing, most on Wall Street focus first on dividend yield. That makes sense in many ways, since the yield represents a direct cash return on an investment. From this perspective, the Coca-Cola-versus-PepsiCo comparison is pretty simple. Coca-Cola's nearly-3.1% yield easily beats out the 2.6% on offer from PepsiCo.
PepsiCo's dividend payout ratio has historically been in line with that of Coca-Cola, which suggests that both dividends are on an equally solid footing. And each of these consumer staples stocks has an investment-grade-rated balance sheet. So the financial risks of a dividend cut at either company seem fairly low. So far, some may see these two as interchangeable dividend options, making Coca-Cola's higher yield the tipping point in the decision process.
However, investors shouldn't really stop there. There's another key factor to consider: dividend growth. The outcome of this comparison is the reverse of the yield comparison, with PepsiCo's annual dividend increasing by 745% since the turn of the century against a 450% increase at Coca-Cola. Put simply, an investor who bought a share of PepsiCo in 2000 would have ended up with a larger income stream in 2022 than one who added a share of Coca-Cola to their portfolio.
Dividend growth leads to stock growth
While not a one-to-one relationship, dividend growth and share price increases often go hand in hand. That's because investors often see a stock's yield as a level that should be roughly consistent, within a range, over time. So if PepsiCo's yield range is centered around 2.6% or so and CocaCola's around 3.1%, then dividend increases will lead to stock advances that end up maintaining that yield. A picture is worth a thousand words here.
Notice how the faster growth trajectory in PepsiCo's dividend tracks along with the faster growth in the stock price? In percentage terms, PepsiCo's stock increased nearly 400% compared to a roughly 100% change in Coca-Cola's share price since 2000.
But the numbers get even more impressive when you look at total return, which assumes the reinvestment of dividends. As the chart below shows, PepsiCo's total return since 2000 is a huge 760% or so compared to just 280% for Coca-Cola. Sure, the higher yield at Coca-Cola may be a bit more alluring today, but over time the higher dividend growth rate at PepsiCo paid off handsomely for shareholders in both a larger income stream and a higher stock price.
This examination is looking at the past, which shouldn't be used to extrapolate the long-term future. However, the dividend increases here in 2022 tracked with the long-term trend. So it seems pretty realistic to expect that PepsiCo and Coca-Cola's dividend growth outlooks haven't suddenly traded places.
Pepsi beats Coke
Clearly there's more work to be done before you make a choice between Coca-Cola and PepsiCo, given that they do have very different businesses (PepsiCo has material exposure to snacks, while Coca-Cola is focused on drinks). However, if you are a dividend investor you shouldn't simply look at the current yields when making your choice. When you also consider dividend growth in the equation, PepsiCo has a material leg up on Coca-Cola. For most investors that will probably tilt the ultimate decision dramatically in PepsiCo's favor.
