Investing in the best dividend stocks is not only about buying companies with big and growing cash flows. Investors need to understand the competitive strengths in the business producing those cash flows in order to position their portfolio in companies having enough soundness to sustain capital distributions over time.
Brand power is a crucial source of competitive strength in the consumer business, and companies such as Coca-Cola (KO 0.32%), Procter & Gamble (PG 1.79%), and Colgate-Palmolive (CL 3.11%) benefit from rock-solid brand power, allowing them to deliver consistently growing capital distributions for shareholders over the long term.
Coca-Cola's sweet dividends
Coca-Cola is the undisputed leader in the global soft drinks market, Coca-Cola and Diet Coke are the two most consumed soda brands in the world, and the company owns an impressive portfolio of 17 brands, each making more than $1 billion in global revenues. In addition, the company has a pipeline of 20 more sparkling and still beverage brands generating annual sales of between $0.5 billion and $1 billion each.
Consumers are moving away from traditional sodas in exchange for healthier choices in main markets such as the U.S., so brand Coca-Cola sales volume increased only 1% in North America during the second quarter of 2014.
Adapting to the trend toward healthier drinks is a considerable challenge for Coca-Cola when it comes to reigniting sales growth, but the company is actively expanding into different categories to satisfy the always-evolving needs of global consumers. Still beverage volume, which includes products such as sports drinks, tea, energy, coffee, and water, increased 5% during the second quarter.
Source: Coca-Cola.
Coca-Cola has recently announced a partnership with Monster Beverage (MNST +1.04%) by which the soda giant is purchasing nearly 16.7% of Monster for $2.15 billion. The companies will also exchange some of their brands, and Monster will have access to Coca-Cola's gigantic distribution network in the U.S. and Canada.
Even if energy drinks are quite questionable when it comes to their health implications, the partnership with Monster shows that Coca-Cola's deep pockets and unique distribution network are enormously valuable assets when it comes to generating growth via acquisitions.
Coca-Cola has an amazing track record of dividend growth; the company has increased its dividends over the last 52 consecutive years, including a 9% hike for 2014. The payout ratio is below 60% of average earnings estimates for 2014, and the stock pays a dividend yield of 3.1%.
Procter & Gamble stands the test of time
Procter & Gamble has a truly exceptional trajectory when it comes to dividend payments. This global leader in different household categories has paid regular dividends since its incorporation in 1890, a whopping track record of 124 consecutive years of consistent capital distributions. In addition, Procter & Gamble has raised dividends during the past 58 years uninterruptedly.
Procter & Gamble pays a dividend yield of 3.2%, and the payout ratio is around 58% when compared to average earnings estimates for the fiscal year ended on June 2015.
Source: Procter & Gamble.
The company is streamlining its brand portfolio to concentrate on its most promising names. Procter & Gamble intends to maintain a more focused portfolio of 70 to 80 brands, many of which are leaders in their categories. This includes 23 brands with annual sales of $1 billion to $10 billion, 14 brands with sales of $0.5 billion to $1 billion, and 30 to 40 brands with sales of between $100 million to $500 million.
In addition, management is planning to save approximately $10 billion in annual spending via productivity enhancements over the coming several years.
Being a market leader in a stable and mature industry, it's not easy for Procter & Gamble to generate sales growth. On the other hand, this also provides reliability and predictability to the company's cash flows, a key consideration to keep in mind when investing in dividend stocks.
Colgate-Palmolive makes investors smile
Colgate-Palmolive is a worldwide leader in oral care. The company does business in more than 225 countries and produces over 75% of sales in international markets. Management estimates that the company owns a global market share of 44.3% in toothpastes, 33.5% in manual toothbrushes, and 38.5% in mouthwashes.
The company has built a deep relationship with dental care professionals around the world, making it the most recommended brand in the industry for a wide margin. This is a big advantage for Colgate-Palmolive in terms of brand awareness and product differentiation.
Source: Colgate-Palmolive.
Foreign currency fluctuations are being a drag on performance lately, but a big presence in international markets allows Colgate-Palmolive to generate considerable growth rates for a company of its size. Organic sales, meaning sales excluding foreign exchange fluctuations, acquisitions, and divestments, grew 4% annually during the second quarter in 2014.
Colgate-Palmolive pays a dividend yield of 2.3%, and the payout ratio in the area of 48% of earnings forecasts for 2014 leaves ample room for further dividend increases. The company has paid uninterrupted dividends since 1895, and it has raised its distributions for 51 years in a row.
Kew takeaway
Dividends don't only provide income for investors; a solid trajectory of dividend growth is a strong reflection about a company´s quality and fundamental strengths. Coca-Cola, Procter & Gamble, and Colgate-Palmolive rely on powerfull brands to differentiate their products from the competition, and this says a lot about these companies and their ability to consistently increase dividends over years to come.
