3 Top Dividend Stocks to Buy Right Now

The major market indexes have surged to new highs as growth stocks take the spotlight once again. However, many investors like to have some passive income to get by when the inevitable dip occurs.

Here's why three Motley Fool contributors believe PepsiCo (PEP -0.62%), Williams-Sonoma (WSM 0.17%), and Starbucks (SBUX 0.47%) are great dividend stocks to buy right now.

A classic dividend stock

John Ballard (PepsiCo): Companies that sell goods that people buy every day can make for solid income investments. PepsiCo is one of the best consumer brands to consider. It has a leading position in snacks and beverages, with a large portfolio of brands like Quaker Oats, Doritos, and Gatorade. Last year, the company generated $9 billion in profit, which funded its 52nd year of dividend increases.

PepsiCo is still capable of delivering growth to keep growing the dividend for many years. Management sees tremendous opportunities in developing markets and fast-growing categories like energy drinks.

The dividend should continue to increase as the business expands. Management's long-term goal is to deliver adjusted earnings growth in the high-single-digit range on an annualized basis.

PepsiCo's above-average yield highlights the value in the shares right now. The current dividend yield is 3.05%, which is about twice the market average. The combination of earnings growth and the yield should deliver total shareholder returns on par with the major market indexes.

This resilient retailer just gave investors a raise

Jeremy Bowman (Williams-Sonoma): You might be surprised to learn that shares of Williams-Sonoma, the high-end home furnishings retailer, have more than doubled over the last year.

Even in a challenging market for home goods with sluggish real estate sales and high interest rates, Williams-Sonoma continues to generate strong profits and has kept nearly all of its revenue gains from the pandemic.

Even as comparable sales fell 6.8% year over year in the fourth quarter, reflecting the sector-wide challenges, Williams-Sonoma drove impressive margin expansion with gross margin up 480 basis points to 46%. As a result, its operating margin rose from 19.2% to 20.1%, and earnings per share increased from $5.28 to $5.44 as the bottom line continued to benefit from share repurchases.

Better yet, Williams-Sonoma surprised investors with a 26% increase in the quarterly dividend to $1.13 a share, and announced a new $1 billion share buyback program, a sign of confidence in the business and a commitment to returning capital to shareholders.

The company's guidance indicates the worst of the sector downturn is behind it as it sees revenue stabilizing this year, calling for flat top-line growth, and for operating margin to improve from 16.1% to 16.5%-16.8%. That, along with share buybacks, should drive earnings growth this year, and over the longer term, the company should benefit from the expected decline in interest rates and a recovery in the housing market, which will promote spending on home furnishings.

Williams-Sonoma also reaffirmed its guidance of mid- to high-single-digit annual revenue growth and operating margin in the mid to high teens.

With a dividend yield of 1.6%, the retailer might not wow income investors, but it has the right formula for consistent dividend increases and steady earnings growth, and it looks well set up to reward long-term investors.

The largest coffee chain in the world

Jennifer Saibil (Starbucks): Starbucks is by far the largest coffee shop chain in the world, with more than 38,500 stores. However, it's nowhere near finished in its expansion efforts, and management thinks it can reach 55,000 stores over the next few years. That could propel it to the largest restaurant chain in the world.

At this point, Starbucks runs a smooth operation. It can open hundreds of stores in a quarter and hit the ground running with a model that works and customers love, leading to high profits and strong comparable sales (comps) growth. It has continued to generate increased sales after a pandemic dip despite global economic and geopolitical volatility. And when it was worried about getting stale, it brought in a new CEO to refresh and improve. It has launched several recent initiatives to revitalize the brand, such as on-demand single-cup brewing machines and a larger food menu. It's focusing on its membership program, which builds Starbucks' relationship with its most loyal customers and leads to higher engagement and sales.

In the 2024 fiscal first quarter (ended Dec. 31), sales were up 8% year over year driven by a 5% increase in comps. Operating margin widened to 15.8%, and earnings per share were up 20% to $0.90.

As Starbucks has moved from a growth stock to a value stock, it's focusing on its dividend to create shareholder value. It yields 2.5% at the current price, well above the S&P 500 average of 1.5%. On top of that, it has increased its dividend by 340% over the past 10 years, far more than classic dividend stocks like Coca-Cola and Procter & Gamble.

Starbucks has been dealing with many problems lately, including high union sentiment at many of its branches, and its stock is down 7% over the past year. But its fortunes could quickly change, and it could return to beating the market along with paying a reliable and growing dividend.