I used to think soda and beer were discretionary purchases, but it seems consumers are more than willing to sacrifice other needs to get their daily fix, making these products a staple of modern life. Another interesting thing about this sector is that consumers tend to have strong brand loyalty to their beverage of choice. If you've been drinking Dr. Pepper since you were seven years old, you're unlikely to settle for a generic or store brand version. The same thing goes for beer. You might try something different now and then, but you have your tried and true favorite that you buy on a regular basis.
Since I'm always on the hunt for new opportunities to diversify and build my dividend income portfolio, I looked to the beverage sector for some new investing ideas. Current market volatility may present some nice opportunities to buy beverage companies that offer growth and pay a decent yield based on increasing revenues and earnings. Here are five that fit the bill:
The Coca Cola Company (KO)
Shares of this 126-year-old company have been on fire. They are up 8.62% year to date. The company has a 50-year history of raising its dividend and it's a core holding for many dividend growth investors. Also, Coca Cola has announced a proposed 2 for 1 stock split in August. With the recent run up in price, however, I am waiting for a better entry point before adding more shares.
Current Price: $74.94
52 Week Range: $61.83 - $77.29
Current P/E: 19.88
Forward P/E: 16.80
Annual Dividend: $2.04
Payout Ratio: 49.96%
Market Cap: $169.06 Billion
I hold 32.909 shares of Coca Cola with a cost basis of $60.93 per share in my dividend income portfolio.
Pepsico Inc (PEP)
Not just a beverage company, but also an international snack and food manufacturer with brands like Quaker Oats, Aunt Jemima, Near East, Cap'n Crunch, Gamesa, Fritos, and Lay's Chips, Pepsico offers investors the opportunity to own several great brands with widespread market share.
Pepsico has had a rough year due to rising commodity costs, and has only managed to raise its dividend about 4% this year. However, the long term outlook for Pepsico is good, with a projected earnings growth of 6.31% over the next five years. The company also has a 40-year history of raising its dividend.
Current Price: $68.70
52 Week Range: $57.11 - $69.75
Current P/E: 17.05
Forward P/E: 15.51
Annual Dividend: $2.15
Payout Ratio: 50.44%
Market Cap: $107.44 Billion
I hold 46.7154 shares of Pepsico with a cost basis of $58.78 per share in my dividend income portfolio.
Dr Pepper Snapple Group Inc (DPS)
A smaller player in the beverage space, Dr Pepper Snapple produces regional and national brands like Dr. Pepper, 7UP, Crush, Hires Root Beer, Country Time Lemonade, Diet Rite, Clamato, Snapple Teas and Hawaiian Punch.
Dr Pepper Snapple doesn't have the international exposure of Coca Cola and Pepsico. However, with international growth stalling, that may be a good thing in the short term.
The company has done a good job of growing its dividend in the recent past. In 2010, its initial quarterly dividend was $0.15 per share, and its current quarterly dividend is $0.34 per share.
Current Price: $42.90
52 Week Range: $33.23 - $43.42
Current P/E: 15.77
Forward P/E: 13.45
Annual Dividend: $1.36
Payout Ratio: 46.79%
Market Cap: $9.09 Billion
Molson Coors Brewing Co (TAP)
Molson Coors Brewing has a solid stable of well known beer brands including Coors, Coors Light, Molson, Blue Moon, Keystone Light, Miller Lite, and Carlson. Molson Coors also recently completed an acquisition of Starbev, adding a significant eastern European presence.
I see one downside for Molson Coors -- the increasing popularity of smaller, regional craft breweries. These specialty breweries have the potential to decrease Molson Coors' market share and revenue. It's unclear at this stage, however, if consumer interest in regional brews is a fad or a long term trend.
Also, Molson Coors did not raise its dividend this month as many had hoped. An increase would have marked five years of dividend growth for the company, and many investors were surely disappointed in the dividend freeze. However, the payout ratio is low and once the company's recent acquisition is absorbed, it may begin raising the dividend again.
Current Price: $38.96
52 Week Range: $37.09 - $45.55
Current P/E: 10.76
Forward P/E: 10.17
Annual Dividend: $1.28
Payout Ratio: 30.04%
Market Cap: $7.04 Billion
Coca Cola Enterprises Inc (CCE)
Coca Cola Enterprises is a bottling, marketing and distribution company for Coca Cola products in Belgium, Great Britain, France, Luxembourg, the Netherlands, Norway, and Sweden.
Recent dividend growth has been strong, and the company has a 5-year history of raising dividends. Plus, a low payout ratio leaves room for further dividend increases. Still, macro trends in Europe could cause troubles for Coca Cola Enterprises in the near term.
Current Price: $26.95
52 Week Range: $22.64 - $30.55
Current P/E: 11.57
Forward P/E: 10.57
Annual Dividend: $0.64
Payout Ratio: 23.54%
Market Cap: $8.09 Billion
One downside to beverage stocks is that these companies are exposed to commodity costs. With primary ingredients like corn syrup, citric acid, flavorings, grains, and packaging materials, any price hike in these necessary raw materials cuts into profits.
To address this issue, companies typically raise prices or reduce product sizes to help pass the costs on to the consumer. However, these price increases or size changes must be phased in gradually to avoid sticker shock.
Here is a good example: where I live, Coca Cola is now sold in smaller 16-ounce bottles for $0.99 and 1.25-liter bottles for $1.25 ,versus the 20-ounce and 2-liter bottles that used to sell for similar prices. Using this strategy, the local bottler is able to charge the same price for significantly less product.
But this size reduction trend is not new in the food and beverage sector. The serving sizes of coffee, ice cream, and snacks have dwindled for quite some time while prices have stayed the same or increased. Still, it seems to be a proven, profitable method for the companies that make and/or distribute these items.
I believe that these companies, when purchased at the right price, offer the dividend income investor a valuable means to generate a solid and growing dividend stream for many years to come.
Financial data sourced from Finviz.com. Current price reflects stock price at the time this article was written.