Investors who weren't on the dividend bandwagon before have had ample opportunities over the past year to see why dividend payers are so valuable to hold in a stock portfolio. It's not surprising that many dividend stocks beat the market last year.
As dividend stocks gain in value, their yields move inversely. But yield isn't the only thing important in these companies. Dividend growth over time is a significant factor in assessing a stock's worth, as is the reliability of the payout.
And don't forget to consider how well the company performs overall. That affects the stock's value as well as the company's ability to keep up its amazing dividend. Coca-Cola (KO 0.68%) and Williams-Sonoma (WSM -0.54%) are excellent dividend stocks that are maintaining robust performance while providing high yields for shareholders.
1. Coca-Cola: the classic dividend stock
Coca-Cola has demonstrated phenomenal resilience over the past year, heading off inflation through cost management and incredible pricing power. It took actions to become leaner when it was highly affected by the beginning of the pandemic, and that positioned it well to stay agile despite the pressures.
Sales increased 11% year over year in 2022, and earnings per share (EPS) declined 3%. Free cash flow decreased 15% from last year, but was still robust at $9.5 billion. Free cash flow is an important metric for any company because it indicates fiscal health. And it's particularly relevant for a dividend stock because it powers the payout.
Management gave comparable numbers, which exclude its acquisition of Body Armor sports drinks, because expenses associated with it weighed heavily on the bottom line.
Comparable EPS, for example, increased 7% over last year. Management believes that is an important indication of overall operational health. Full-year operating margin dropped from 26.7% last year to 25.4% this year, but the comparable operating margin stayed flat at 28.7%.
Both comparable EPS and free cash flow have been very strong over the past five years.
Coca-Cola EPS and free cash flow trends over the past five years. Image source: Coca-Cola.
Management was able to raise prices, which led to revenue increases without curbing demand, demonstrating its pricing power. This is the kind of durable competitive edge that makes it stand out as a Warren Buffett stock (it's his longest-held equity position).
Coca-Cola's dividend yields nearly 3% -- around its usual level -- at the current share price. It's a Dividend King and has been raising its payout annually for 60 years. And it looks to be reliable for years of higher growth.
2. Williams-Sonoma: a resilient consumer base
Williams-Sonoma sells upscale home goods on its website and in its stores. It also owns Pottery Barn, its highest-revenue brand, and several other names.
It targets a sweet spot of affluent customers who are more resilient spenders, while avoiding the highest echelon of luxury goods that could hurt spending under pressure, like now.
Sales and profitability have been strong despite inflation. It typically is able to make more full-priced sales for its premium products, another sign of its resilency.
Revenue increased 6.5% year in 2022, and EPS increased 11%. Operating margin slightly contracted, but it's well ahead of where it was before the pandemic.
WSM operating margin (annual) data by YCharts.
Management is guiding for a range of a 3% decrease to a 3% increase in sales for 2023, with an operating margin of 14% to 15%; that would be a big slowdown for both. The company is still cycling through some of the incredible growth it experienced earlier in the pandemic, and combined with inflation, it's starting to have an effect.
But the long-term opportunity remains enormous. It has about 1% of what it says is an $830 billion market. Digital shopping accounts for 66% of its sales.
Management raised the dividend 15% last week, and at the current share price, it yields 2.5%.
Williams-Sonoma is trailing recent market gains with a 22% loss over the past year, but it has soundly outperformed the market over time. There's every reason to believe that it can continue to do so in the long term, and increase its juicy dividend.
