PepsiCo (NYSE:PEP) is one of the most well-known and highly regarded dividend stocks out there, and for good reason. PepsiCo has a long track record of paying a dividend. It also has the financial strength to raise its dividend year after year. This makes PepsiCo an ideal dividend stock for investors to buy, particularly for retirees. Investors in or nearing retirement often desire income from their investments to help replace the income lost from no longer receiving a paycheck. That's where dividend stocks can play a huge role in a retirees' portfolio. Here are two reasons why PepsiCo definitely qualifies as a top dividend stock to buy right now.
High yield and dividend growth
Sometimes, a stock pays a high yield but doesn't grow its dividend. Other times, it's the reverse, whereby a stock has a high rate of dividend growth but a very low dividend yield. Stocks like these can leave an investor feeling as though there's a missing piece of the puzzle. PepsiCo, however, is an ideal mix of dividend yield and dividend growth. The stock currently yields 2.7%, which compares favorably with the current dividend yield of 1.88% for the S&P 500 Index.
If that weren't enough, PepsiCo has a great track record of dividend growth. PepsiCo has increased its dividend for 42 years in a row. Over the past five years, PepsiCo has raised its dividend by 7% compounded annually. This means PepsiCo's dividend doubles every 10 years or so on average.
The bottom line is that investors with both a long and a short time horizon can benefit from owning shares of PepsiCo. Investors who need income now receive an above-average yield that exceeds the yield on the broader stock market as well as the 10-Year U.S. Treasury Bond. Investors looking for income down the road will see their dividends grow significantly over time from PepsiCo's solid dividend growth rate.
Diverse business model yields strong profits
The reason why PepsiCo can maintain a high dividend yield as well as high dividend growth at the same time is a credit to its strong business. PepsiCo has a large and diversified business. It operates two core segments, food and beverages, and its revenue split is about even between the two. Its beverages include its flagship Pepsi, Tropicana, as well as Gatorade. Its food business includes Frito-Lay and Quaker.
Its strong brands each contribute meaningfully to growth, which allows PepsiCo to keep rewarding shareholders. PepsiCo generated $5.1 billion of free cash flow over the first three quarters of the year. It paid $2.7 billion worth of dividends during this time. That means PepsiCo's dividend accounts for 53% of its free cash flow. This payout ratio is very modest, and leaves plenty of room for future dividend growth. PepsiCo's ability to pay a high yield, increase its dividend aggressively each year, and still hold a low payout ratio is a testament to its fantastic business.
Expect dividend growth to continue
PepsiCo is still a growing company, thanks largely to growth in the emerging markets. For example, PepsiCo's revenue grew 11% last quarter in Asia, the Middle East, and Africa, led by rising snacks volumes. Management expects good performance to continue, which is why its full-year forecast calls for mid-single digit organic revenue growth and 9% earnings growth for fiscal year 2014. Assuming PepsiCo hits its forecast, it should have no trouble passing along another strong dividend increase next year. Cash flows will also be boosted by the company's $1 billion cost savings plan for this year.
The company has all the makings of a great dividend stock. It is a large, established company with a diversified business model. Its wide range of products bring in strong free cash flow, and management is committed to returning lots of its cash flow to shareholders. Income investors who enjoy receiving quarterly dividend checks from their stock investments should buy PepsiCo.
Bob Ciura owns shares of PepsiCo. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.