Anheuser-Busch vs. Coca-Cola: Which Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two massive beverage companies will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Headquartered in Leuven, Belgium, Anheuser-Busch InBev (BUD 1.43%) is the world's largest brewer, commanding nearly 25% of the global beer market. This amalgamated company is the result of Belgian-Brazilian brewer InBev -- itself a merger of AmBev and Interbrew -- acquiring Anheuser-Busch in 2008. The company has a portfolio of more than 200 brands, including world-famous Budweiser, Corona, Stella Artois, Beck's and Brahma, which fuels more than $1 billion in sales. Several of AB InBev's brands date back well over a century; Budweiser dates to the 1870s, and Stella Artois was originally brewed as a seasonal lager for the Den Horen brewery in Belgium, which has records dating to the 1360s!

Established in 1892, Coca-Cola (KO 2.14%) is the world's largest nonalcoholic beverage company. Headquartered in Atlanta, Coca- Cola owns, licenses and markets more than 500 beverage brands, and serves more than 1.7 billion consumers every day in more than 200 countries or territories. The company has diversified its products portfolio through various major acquisitions like Minute Maid in 1960, Indian cola brand Thums Up in 1993 and Barq's in 1995. Coke's story is all about a triumph of marketing during the consumerization of America -- when you identify Santa Claus and polar bears with a fizzy drink, you know someone's done a good job with their branding.

Source: Morningstar and YCharts.
*Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round one: endurance (dividend-paying streak)
Anheuser-Busch InBev has been paying yearly dividends since 2010, following its merger, but that doesn't accurately capture the company's streak -- Anheuser-Busch held a 31-year streak of dividend increases prior to its merger. However, a lack of earlier data makes this is an easy win for Coca-Cola, particularly considering when it began paying dividends. Coke has paid uninterrupted dividends each quarter for more than nine decades, since 1920 -- one year after the passage of Prohibition in the United States. It's probably reasonably safe to assume that Anheuser-Busch was more concerned with staying afloat than paying back its shareholders during those years.

Winner: Coca-Cola, 1-0.

Round two: stability (dividend-raising streak)
Anheuser-Busch InBev was created in the summer of 2009 and has increased its payouts at least once every year since it began paying dividends in 2010. Combine that with its 31-year streak before its merger and you get 35 years of consecutive growth. However, Coke has been increasing its dividend at least once per year since 1963, according to dividend.com. A 50-year streak of dividend raises lets Coca-Cola win the stability crown without breaking a sweat.

Winner: Coca-Cola, 2-0.

Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

BUD Dividend Yield (TTM) data by YCharts

Winner: Coca-Cola, 3-0.

Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's look at the growth in payouts over the past five years.

BUD Dividend data by YCharts

Winner: Anheuser-Busch InBev, 1-3.

Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

BUD Common Stock Dividend Payout Ratio (TTM) data by YCharts

Unfortunately, YCharts lacks data on AB InBev's free cash flow payout ratio, but calculating that from the company's cash flow statement (simply divide trailing 12-month dividends paid by free cash flow for the same period) gives us a result of 57.4%, narrowly sliding under Coke's latest result.

Winner: Anheuser-Busch InBev, 2-3.

Bonus round: opportunities and threats
Coca-Cola may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

Anheuser-Busch InBev opportunities

• AB InBev recently rolled out cider varieties of Stella and Michelob Ultra.
• The company recently acquired Mexican brewer Grupo Modelo for $20.1 billion.
• The company is expanding its capacity in China and Brazil to meet growing demand.
• AB InBev ranks third in beer sales in China, leaving ample room for growth.

Coca-Cola opportunities

• Coke has been testing moderate-calorie versions of Fanta and Sprite sweetened with stevia.
• The company's EKOCENTER partnership assures safe drinking water to rural communities, and also serves to extend its supply chain.
• Coca-Cola's growth will be supported by 1 billion new members of the middle class by 2020.
• The company recently launched Sprite Cranberry, the first new Sprite flavor since 2005.

Anheuser-Busch InBev threats

• Boston Beer's Angry Orchard line of ciders has become a market leader.
• Heineken is also pushing its very popular Strongbow brand of cider.
• The American beer market has been stagnant for years, so much of AB InBev's growth must come from overseas or via acquisition.

Coca-Cola threats

• Increasing health concerns and negative publicity are discouraging people from drinking soda.
• Coke's Vitaminwater brand is embroiled in a ridiculous false-advertising lawsuit.

One dividend to rule them all
In this writer's humble opinion, it seems that Coca-Cola has a better shot at long-term outperformance, thanks to its diversified portfolio, strong brand recognition, and ability to adjust to new consumer taste preferences -- but growing health concerns may pose threat to its legendary soft drink business. Anheuser-Busch InBev's active acquisition strategy has been its primary growth engine in recent years, and there isn't a lot more space to enter in what seems to be a fully matured global beer market. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!