Dividend stocks come from all industries. One sector that currently offers some satisfying payouts is the beverage industry. Coca-Cola (KO +0.31%), Starbucks (SBUX +0.74%), and Keurig Dr Pepper (KDP 0.42%) boast dividend yields of 2.5% or higher, putting them well above the S&P 500's current dividend yield of less than 1.4%.
Here's why those seeking to collect more dividend income should look closer at these beverage stocks.
Dividend royalty
NYSE: KO
Key Data Points
Coca-Cola's dividend yields 3.2%. The beverage giant has an exceptional record of increasing its dividend payments. It gave its investors a 5.4% raise earlier this year. That marked its 62nd consecutive annual dividend increase. It kept Coca-Cola in the elite group of Dividend Kings, companies with 50 or more years of dividend increases.
The company's dividend isn't likely to fizzle out anytime soon. The beverage behemoth's long-term target is to organically grow its revenue by 4% to 6% per year by raising prices and increasing volumes. That should drive 7% to 9% annual earnings-per-share growth and healthy free cash flow growth.
That growing free cash flow, which should total $9.2 billion this year, will give Coca-Cola the funds to pay a growing dividend ($8 billion in 2023) and repurchase shares while maintaining its elite balance sheet. The company's financial strength gives it the flexibility to make acquisitions as compelling opportunities arise to add a little more pop to its already solid growth profile.
Adding some pop to the payout
NASDAQ: KDP
Key Data Points
Keurig Dr Pepper doesn't have quite the dividend-paying track record of Coca-Cola. However, it offers a 2.9% dividend yield. Meanwhile, the company has grown its dividend at an 11% compound annual rate over the last three years. It was able to add some more pop to the payout after achieving its leverage target following the merger of Keurig Green Mountain and Dr Pepper Snapple Group in 2018, which created North America's third-largest beverage company.
Dividend growth is a key aspect of the company's strategy. It currently has a relatively low dividend payout ratio (45%), which enables it to retain lots of cash for debt reduction, share repurchases, and opportunistic investments. Since the merger, Keurig Dr. Pepper has cut its leverage ratio in half, from about 6 to around 3, while also investing more than $2.5 billion into high-growth category platforms and making $2.2 billion of opportunistic share repurchases over the past three years.
Keurig Dr Pepper's long-term ambition is to deliver mid-single-digit net sales growth while increasing its earnings per share at a high single-digit rate. That should enable the company to generate growing free cash flow to increase its dividend while giving it the optionality to opportunistically repurchase shares and make acquisitions.
Caffeinated growth
NASDAQ: SBUX
Key Data Points
Starbucks has the lowest yield in this group at 2.5%. However, that's still a lot higher than the S&P 500. Further, the coffee giant has done a tremendous job increasing its dividend over the years. It has grown its payout at a 20% compound annual rate since initiating the dividend 13 years ago, including by 7.5% last September.
The company should be able to continue growing its dividend in the future. It launched its bold triple shot reinvention strategy last year. It plans to become more global by accelerating its store expansion to 55,000 locations worldwide by 2030 (up from around 38,000 at the end of last year). The company also aims to unlock efficiency gains to save $3 billion in costs over the next three years.
These catalysts should drive caffeinated revenue and earnings growth. The company's long-term target is to grow its revenue by more than 10% annually while delivering 15%+ earnings growth. That faster growth could enable Starbucks to deliver accelerated dividend growth in the future.
Quenching dividend stocks
Coca-Cola, Keurig Dr Pepper, and Starbucks can quench an investor's thirst for more income. The beverage giants pay higher-yielding dividends that should continue growing in the future. That makes them great stocks to buy and hold for a steadily rising income stream.
