We recently published a list of 15 Best Dividend Stocks To Buy and Hold. In this article, we are going to take a look at where The Coca-Cola Company (NYSE:KO) stands against other best dividend stocks to buy and hold.
In recent years, many investors have shifted their focus from dividend-paying stocks to high-growth secular-themed stocks that typically don’t offer dividends. However, history shows that investors shouldn’t overlook dividends. According to estimates by AGF Investments, the long-term case for dividend-paying equities is strong: if a dollar was invested in the broader market Index in 1927 without reinvesting dividends, it would be worth $243 today. In contrast, that same dollar with dividends reinvested would be worth $3,737.
Because of this earnings and income potential, income investors often turn to dividend stocks when the market shifts. While these stocks may not be keeping pace with the broader market, analysts remain optimistic about their future prospects. A report from J.P. Morgan indicated that global equities are approaching a notable period of dividend growth, not just due to a cyclical rise in payouts but also because of a long-term increase in dividend momentum. Over the past 20 years, global dividends per share have grown at an annual rate of 5.6%, but analysts predict this growth will accelerate to 7.6%. The main factor driving this increased growth is the low starting point of payout ratios (dividends as a proportion of earnings). During the Covid pandemic in 2020, many companies cut their dividends, leading to a 12% drop in global dividends, which was a steeper decline than during the Global Financial Crisis. This was a rational response to an uncertain environment with unpredictable effects and duration.
READ ALSO: 10 Most Promising Dividend Stocks According to Hedge Funds
However, equity markets rebounded strongly as global earnings soared, primarily driven by Big Tech and, more recently, AI. Since dividends are typically determined by conservative boards and management, they tend to lag behind earnings during significant earnings surges. As a result, dividend payout ratios are now near their lowest levels in 25 years, meaning companies are paying out less compared to historical averages. Simply returning to a more typical payout level could contribute an additional 2% annual growth over the next five years. This isn’t just a theoretical scenario—global dividend growth has already started to exceed earnings growth in seven of the past eight quarters, as reported by J.P. Morgan.
While recent market gains have largely been driven by a small group of non-dividend-paying companies, this is starting to shift. In 2024, many big tech companies initiated their dividend policies, highlighting the importance of returning capital to shareholders and positioning dividends as a complement to share buybacks. The report highlighted that although the dividend yields from these tech giants are initially modest, the total amount they are committing to dividends is significant—$17 billion collectively over the next year. More importantly, these actions send a strong signal to the market.
Income-focused investors have increasingly turned their attention to dividend income, making it a more prominent part of personal earnings. A report by S&P Dow Jones Indices reveals that dividend income has risen from 2.68% in Q4 1980 to 7.88% in Q2 2024, demonstrating its growing importance as an income source. The report further highlighted that since 1936, dividends have accounted for over a third of total equity returns, with the rest coming from capital gains.
Our Methodology
For this list, we scanned through various credible sources, including Business Insider, Forbes, Morningstar, and Barron’s, and identified their consensus picks from their recent articles. Next, we sorted these companies based on the number of hedge funds in Insider Monkey’s database that owned stakes in these companies, as of Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A row of factory workers assembling bottles of sparkling soft drinks on a conveyor belt.
The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders: 69
The Coca-Cola Company (NYSE:KO) is an American multinational beverage company. As a well-established leader in its sector, the company generates substantial profits, with operating margins consistently exceeding 20%, indicating efficient and profitable operations. Shareholders face minimal financial risk, as the company continues to deliver strong profits even during economic downturns. In the third quarter of 2024, it reported nearly $12 billion in revenue, beating analysts’ expectations by $290 million. The company also demonstrated solid cash generation, with an operating cash flow of $2.9 billion and a free cash flow of $1.6 billion. In addition, it achieved a remarkable adjusted operating margin of 30.7%, showcasing its strong profitability.
The Coca-Cola Company (NYSE:KO)’s most significant competitive advantage is its iconic brand, which strengthens its economic moat. It has consistently provided a product that is recognized and trusted by consumers around the globe, cultivating a level of brand loyalty that many companies strive for. This loyalty gives the company the flexibility to adjust its pricing. While unit sales fell by 1% in the most recent quarter, the negative impact was offset by effective pricing strategies, highlighting the strength of its customer base. This resilience contributes to the company’s long-term stability and success. In the past 12 months, the stock has delivered an over 4% return to shareholders.
The Coca-Cola Company (NYSE:KO) is one of the best dividend stocks on our list, having raised its payouts for 62 consecutive years. The company currently pays a quarterly dividend of $0.485 per share and has a dividend yield of 3.10%, as of February 4.
As of the close of Q3 2024, 69 hedge funds in Insider Monkey’s database owned stakes in The Coca-Cola Company (NYSE:KO), up from 68 in the previous quarter. These stakes have a consolidated value of roughly $35 billion. Warren Buffett’s Berkshire Hathaway was the company’s leading stakeholder in Q3.
Overall, KO ranks 4th on our list of best dividend stocks to buy and hold. While we acknowledge the potential for KO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than KO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap
Disclosure: None. This article is originally published at Insider Monkey.