Sipping Buffett's Soda
If you're at all familiar with the world of dividend investing, Coca-Cola (KO) hardly needs an introduction. It's probably best known as one of the dividend darlings of Warren Buffett, who's allocated about 20% of his portfolio to the stock.
And for good reason. No, not because of its yield (which has never been very high). And not because of an aggressive dividend growth rate (which isn't bad, but just above average). But because it's as dependable as dependable gets.
It's raised its dividend for 49 straight years. And when you can count on consistent increases in the long term, yield-on-cost (YOC) trumps a high yield and shoddy increases any time.
Take Buffett, for instance. He first grabbed shares in the late 1980s and his YOC is currently astronomical, with back-of-the-envelope calculations putting it around 50%.
Don't think that you need to hold onto Coca-Cola shares for 20-plus years to realize such benefits, either.
If you take the stock's current projected yield of 2.81% and assume the five-year average growth rate of 8.51% will hold up, your YOC starts looking respectable even within a few short years.
At five years, the YOC is 4.42%, or more than twice the average yield on the S&P 500. At 10 years, the YOC stands at 8.33%, which is beyond the yield provided by most stocks considered safe. And if you've got the wherewithal, holding onto it for 20 years puts you right up there with Buffett at a YOC of 43.31%.
But to top it all off, Coca-Cola's stock is nearing bargain prices. Its valuation of 18.9 times earnings is currently edging downward, approaching both the industry average P/E of 18.6 and its own five-year average P/E of 18.7.
In the end, for long-term dividend investors, better performing, more dependable payers than Coca-Cola are hard to find, especially at present valuations.
Getting Whole Again
There's no getting around it. Whole Foods Market's (WFM) yield is low. At 0.61%, it's barely a pittance.
But the company's now entering its third consecutive year of increases, with an average dividend growth rate of 41% over that period. It's a severe change of pace, especially considering Whole Foods suspended its dividend entirely between 2009 and 2010.
What's driving the change? In short, where there was once a cash drought, there's now an out-and-out glut. And because of it, investors are (sensibly) urging management to give them their due. But don't take my word for it, here's Whole Foods Co-CEO, John Mackey, from the Q4 2012 earnings call:
"We are accelerating our growth and we are increasing our dividend and we are buying back stock and we are piling up cash. Many years ago people asked us, when are you going to have some free cash flow? When are you going to have some free cash flow?
"Now we are hearing, [you've] got too much free cash flow. What are you going to do with all that extra money? So that's what we are going to do with it."
Those are promising words, but let's not jump the gun. Track records are track records and Whole Foods deftly destroyed its own when it kept its dividend program on ice for two straight years.
Still, there's good reason to be hopeful. Prior to the suspension, Whole Foods was on the verge of proven reliability, raising its dividend five times between 2004 and 2008. And it did so at an average rate of 20.2% - aggressive dividend growth by any measure.
What's more, the current dividend payout ratio of 22.2% is barely a blip, meaning payments and increases are more than sustainable.
Give it some time. Whole Foods has a ton of cash and no competition in its specific market. It may indeed turn out to be a dividend growth stock in the (re)making. An improved yield, plus a few years of increases, would make it worthy of consideration.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.