When a company makes a profit, it can pay out a portion to shareholders as dividends. This is a nice reward for shareholders, providing a regular income. However, it is still important to choose strong companies that can not only maintain dividends, but also increase them regularly through higher profits and cash flow.
These three stocks fit the bill. Two of them are Dividend Kings, an illustrious group of companies that have increased their dividends for at least 50 years in a row.
You don’t have to start with a big amount to reap the rewards, either. Investors starting with $5,000 can own shares in these three dividend-paying stocks.
1. Coca Cola
Existing since the end of the 19th century, Coca Cola (NYSE: KO) sells beverages worldwide under popular brands such as its namesake, Sprite, and Fanta. While people may think of it as a soft drink company, its products also include items such as water, juice, and other beverages.
While the company may no longer be growing rapidly, Coca-Cola has increased sales and gained market share. Profitability continues to rise, including a 17% gain in the second quarter after items such as currency effects are removed.
This has resulted in a wealth of free cash flow (FCF). In the first six months of the year, Coca-Cola’s FCF was $3.3 billion. That easily covered the $2.2 billion in dividends.
The board has increased payouts for 62 years in a row, including a more than 5% increase earlier this year to an annual rate of $1.94. Coca-Cola shares have a dividend yield of 2.7%, more than double that of S&P 500is 1.3%.
2. Merck
Merck (NYSE:MRK) produces drugs including the popular Keytruda, which is used to treat several types of cancer. Last year, the drug generated $25 billion in revenue, up 19.5% from the previous year.
Merck’s second-quarter revenue, excluding currency, rose 11%. Fortunately, the company’s results do not fluctuate with the economic cycle, as people need Merck’s important treatments. It is no exaggeration to say that in some cases it is a matter of life and death.
Keytruda remains a major growth driver, with sales accounting for 45% of revenue in the second quarter. But Merck has other drugs, including the popular Gardasil vaccine. It also has other treatments in the pipeline, and earlier this year won approval for Winrevair, which is used to treat pulmonary arterial hypertension.
Merck produces enough FCF to support dividends. In the first half of the year, it had FCF of $7.1 billion in FCF and paid out $3.9 billion in dividends.
The company has been increasing dividends for a number of years. This year, Merck’s quarterly payout was $0.77, up 5.5% from last year. The stock has a dividend yield of 2.6%.
3. PepsiCo
PepsiCo (NASDAQ: PEP) sells beverages, snacks and other food items. This includes soft drinks, chips, cereals and granola bars under well-known brands, including Pepsi, Mountain Dew, Aquafina, Doritos and Quaker.
The company’s adjusted earnings per share grew 10% in the second quarter, despite sluggish revenue growth of 2%. However, the muted revenue growth appears to be temporary based on broad economic factors. Consumers have been stretched by higher prices as other companies such as McDonald’s have reported. With PepsiCo’s powerful brands dominating shelf space in stores, sales volume is sure to increase.
Meanwhile, shareholders can enjoy the 3.1% dividend yield. And management and the board were confident enough about the future prospects to announce a 7% dividend increase in April. The company has paid dividends since 1965 and has increased them annually for 52 years.
PepsiCo can easily pay the payments. The shares have a payout ratio of 73%.
Should You Invest $1,000 in Coca-Cola Now?
Before you buy Coca-Cola stock, you should consider the following:
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool has a disclosure policy.
The Smartest Dividend Stocks to Buy Right Now with $5,000 was originally published by The Motley Fool
