The Coca-Cola Company (NYSE: KO) isn’t just a favourite of Warren Buffett‘s; it’s also a cornerstone of my personal portfolio.
This iconic company combines several great long-term investment qualities: double-digit margins and return on equity, low volatility with a beta of 0.57, and unparalleled brand recognition. And who doesn’t enjoy a Classic Coke?
Yet, what truly draws many investors to Coca-Cola is its dividend. Currently yielding 3.1%, it may not be the highest, but its consistency is unmatched – a staggering 62-year streak of dividend growth.
Here’s all you need to know about Coca-Cola’s dividend and my assessment of whether this stock is a buy right now.
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Coca-Cola’s dividend
Coca-Cola in one of the 40-ish “Dividend Kings,” a title reserved for stocks that have maintained a minimum of 50 consecutive years of dividend growth.
Currently, Coca-Cola pays investors a quarterly dividend of $0.485 USD per share. The most recent ex-dividend date was March 14th, with the dividends actually paid on April 1st (your brokerage might receive them slightly later).
For those unfamiliar, the ex-dividend date is crucial as it determines who is eligible to receive the upcoming dividend payment.
To receive a dividend, an investor must purchase and hold the stock before the ex-dividend date; those purchasing on or after this date will not receive the dividend until the next cycle.
Reflecting on the past years, the dividend has shown steady growth: $0.46 in 2023, $0.44 in 2022, and $0.42 in 2021. If trends continue and everything progresses as expected, we might anticipate the dividend rising to $0.50 next year.
Therefore, Coca-Cola’s dividends have grown by approximately 5.2% annually from 2021 to 2024. That beats inflation!
Is Coca-Cola a buy?
I continue to gradually add to my holdings of Coca-Cola and consistently reinvest the dividends.
However, I wouldn’t classify it as a “screaming buy” at the moment, unlike in March 2020 during the COVID-19 market downturn when I aggressively increased my investment.
The primary reason? Coca-Cola’s earnings yield is currently too low for it to be an irresistible buy.
To understand this, let’s think about it in terms of owning a private business. Imagine you own a company that has a forward price-to-earnings (P/E) ratio of 22.3, which is identical to Coca-Cola’s current P/E.
In simple terms, a P/E ratio tells you how many dollars you are paying for every dollar of the company’s earnings.
So, if a company like Coca-Cola has a forward P/E ratio of 22.3, this means that as an investor, you are paying $22.32 for every $1 of Coca-Cola’s expected earnings.
Now, by taking the inverse of the P/E ratio, we arrive at an earnings yield of approximately 4.3%.
Now, consider this yield in comparison to the yield you could achieve by investing in a 10-year U.S. Treasury bond, which currently stands at around 4.5%.
When a company’s earnings yield is lower than what you could earn from a risk-free government bond, it suggests that the stock might not offer sufficient return potential relative to its risk.
So, if you can earn more from a safer investment like a U.S. Treasury bond, it raises questions about the attractiveness of investing in a higher-risk asset like stocks when the return is not proportionately higher.
