Dividend stocks are fantastic options for fans of passive income. Once you add a few of them to your portfolio, you can sit back and watch the cash payments arrive each quarter, ideally mixed with some market-beating capital gains. Automatically reinvesting the dividends can supercharge your long-term returns as well by helping you accumulate more shares over the years.
But not all dividend stocks are worth owning. Investors should be careful to focus on companies with strong market share positions and ample cash flows, as these factors tend to support a stable and growing dividend. Coca-Cola (KO) and McDonald's (MCD -0.91%) are prime examples of these types of businesses, and these two stocks are valued attractively right now.
1. Coca-Cola is cheap
Investors have put Coca-Cola stock on the discount aisle in 2023 for some dubious reasons. Yes, the beverage giant is seeing weak sales volumes this year as consumers look to save cash in a slowing economy. However, Coke demonstrated its valuable pricing power over the last few quarters as price increases helped extend its industry-leading profitability.
Operating profit margin is sitting near 30% of sales compared to PepsiCo's 14% rate. Overall organic sales were up a healthy 11% last quarter.
Investors will be watching that key growth metric when Coke announces third-quarter results in late October. They'll be looking for a better balance between rising volumes and higher prices, in particular.
In the meantime, the stock looks cheap today as Coke is one of the worst-performing companies on the Dow Jones Industrial Average index. You can buy shares for 5.3 times sales right now, down from 7 times sales in early 2023. The even better news is that slump raised Coca-Cola's yield to a brisk 3.4%, which investors can consider as a nice bonus on top of the company's excellent growth prospects.
2. McDonald's tasty cash flow
McDonald's is another industry leader that's seeing solid operating trends today. Comparable-store sales were up 12% last quarter, with rising customer traffic in each of the fast-food giant's main geographies. Mickey D's extra focus on fundamentals like food quality and service speed helped it win market share in a competitive selling environment. Its finances are incredibly strong as well. The company boosted its operating profit margin to a record high of 46% of sales, making it one of the most efficient businesses on the planet.
Investors are worried about a growth slowdown ahead. Management did say in a recent conference call with analysts that revenue trends will likely decelerate in the second half of 2023 as reduced inflation lessens the need for price hikes. However, the chain's long-term outlook is bright thanks to its dominant position in the drive-thru niche and ambitious plans for more home delivery sales over time.
Buying the stock today would likely expose an income investor to volatility as Wall Street shifts its attitudes around a potential recession on the way into 2024. That's why it's important to keep your focus on the long term, and on reinvesting this dividend that has grown for 47 consecutive years. By the time that figure crosses 50 and makes McDonald's a Dividend King, you'll likely be very happy that you added the stock to your portfolio back in late 2023.
