One of my favorite dividend growth stocks has been Coca-Cola (KO). I have been recommending them for the last three years as a solid addition to retirement portfolios. Coke has had an incredible run over the past year with its stock price up 23%. Over the past two years it is up 40%.
The jump in the stock price is the good news. But for many long-term dividend investors, this is a serious issue for either reinvesting dividends or buying Coke for the first time. Because of the run-up in the stock price, the dividend yield has fallen from 3.1% a year ago to only 2.5% today.
Because of the serious decline in the dividend yield I want to analyze what investors can expect going forward in terms of the dividends contributing to overall total returns.
KO Profile*:
The Coca-Cola Company, a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company primarily offers sparkling beverages and still beverages. Its sparkling beverages include nonalcoholic ready-to-drink beverages with carbonation, such as carbonated energy drinks, and carbonated waters and flavored waters. The company’s still beverages comprise nonalcoholic beverages without carbonation, such as noncarbonated waters, flavored waters and enhanced waters, noncarbonated energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks
*Profile taken from Yahoo Finance.
| KO: |
| Div Yield | 1 Yr Div
Growth Rate | Annualized 5 Yr Div
Growth Rate |
| 2.5% | 8.5% | 10% |
| Payout Ratio | Debt to Equity |
| 52% | 99% |
Although the dividend yield isn’t impressive at 2.5%, the growth rate of Coke’s dividend has been impressive over the past five years. It’s important to analyze scenarios for such a company where we look at both the dividend yield and growing dividends. I ran the following scenario on our publicly available calculator called Total Returns- Dividends Vs. Price Appreciation. If we buy 1,000 shares today, apply the one year dividend growth rate of 8.5% over the next 10 years, reinvest dividends, and assume the price of the stock does not change, we get the following:
| Inputs: |
| Investment | Dividend Yield | Growth of
Dividend (Annual) |
| $79,000 | 2.5% | 8.5% |
| Outputs: |
| Total Return | Annual Return | FV Dividends | FV Investment |
| 42% | 3.6% | $33,366 | $79,000 |
The annual total return we can expect if the stock price doesn’t move over the next 10 years is 3.6%. This is not an overwhelming return to say the least. It barely beats today’s inflation rate.
I believe that given the decline in Coca-Cola’s dividend yield, there are better alternatives out there today for dividend-growth investors. One of these is Procter & Gamble (PG). I found that if PG’s dividend growth continues at its recent one year pace, it will return 4.8% per year even if the stock price doesn’t budge. If we analyze Microsoft (MSFT) the same way, it will return 4.9% per year.
Coca-Cola had a great run and I loved having it in my retirement portfolio. But it is now time to look for better long-term investments until the dividend yield increases substantially.