Investors looking for dividends will likely be disappointed by the yield of the S&P 500 index. In the wake of its long rally, the broad market index yields a paltry 1%. You calculate any investment's yield by dividing the payout by the investment's price. Hence, when the price grows faster than the dividend, the yield shrinks.
By contrast, in 1982, amid a severe recession, when share prices fell, the index yielded 6.2%. More recently, in January 2009, during the Great Recession, its yield rose to 3.2%.
Still, you can find individual stocks within the index today that have much higher yields as well as upside price potential. PepsiCo (PEP +1.58%), which has raised dividends annually for many years, belongs in that category.
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Price cuts are a positive sign
After nine consecutive quarters of declining sales volumes, and facing broadening consumer irritation over its pattern of price hikes, the food and beverage company decided to alter its strategy early this year. Rather than continuing to raise prices, management began to cut them in a bid to increase consumer demand and keep competition from lower-priced private-label brands at bay.
You can see the positive results of that pivot already. PepsiCo's revenue grew 2.6% year over year in the first quarter, with rising volumes contributing slightly. Matters continued to head in the right direction in the second quarter, with higher sales volume accounting for about 1 percentage point of the company's 2.4% revenue gain.
That contrasts to last year, when price increases were solely responsible for its top-line increases. For all of 2025, revenue rose 2%, with higher prices adding 4 percentage points and lower sales volume subtracting 2 percentage points.
The business seems to be on a more solid footing. After all, a company can't continue raising prices while losing sales volume.
Secure dividends
Meanwhile, investors who own PepsiCo can feel good about their dividends. In fact, earlier this year, the board of directors raised the payout by 4% to an annualized $5.92 per share. With a payout ratio (dividends divided by earnings) of 75%, PepsiCo can certainly afford the higher payout.
The latest increase made it 54 consecutive years that the company has increased payments. The streak has earned PepsiCo a spot as a Dividend King, a designation reserved for those rare companies that have raised their payouts for at least 50 straight years.
At the new annualized rate and the current share price, PepsiCo's stock has a 4.2% yield. That's quadruple the yield of the S&P 500.
Valuation remains attractive
Though the business is heading in the right direction, the market seems to have adopted a wait-and-see attitude with regards to the stock. It has fallen 3.9% this year through Monday morning, in stark contrast to the S&P 500's 13.6% gain.
NASDAQ: PEP
Key Data Points
However, that's made the valuation more compelling. PepsiCo's price-to-earnings (P/E) ratio has dropped from 24 to 18 this year. That's below its 10-year median of 26.
The shares also trade at a lower P/E multiple than the overall market. The S&P 500 has a P/E ratio of 30.
But PepsiCo won't stay a bargain forever. In light of its high dividend yield, secure payout, and compelling valuation, and with product sales volumes starting to recover thanks to management's actions, investors should view this as a narrow opportunity to purchase PepsiCo stock.
