Many dividend stocks lost their luster over the past two years as rising interest rates drove investors toward fixed-income investments. For those prudent investors, it didn’t make sense to buy a riskier dividend stock with a 3%-4% yield when they could simply park their cash in risk-free CDs or Treasury bills to earn interest payments of more than 5%.
But with interest rates set to potentially decline over the next year, those guaranteed yields are likely to shrink and drive investors toward blue chip dividend stocks again. Before that shift happens, investors should consider investing some available cash, $10,000 for example, in stock for Coca-Cola (NYSE: KO), Realty Income (NYSE: O), and Philip Morris International (NYSE: PM) to earn hundreds of dollars in extra dividend income every year.
1. Coca-Cola
Coca-Cola is a classic dividend stock for three simple reasons: It owns a portfolio of evergreen beverage brands, it generates consistent earnings growth through good times as well as economic downturns, and it’s raised its dividend annually for 62 consecutive years.
To counter declining soda consumption rates across the world, Coca-Cola expanded its portfolio with more brands of bottled water, fruit juices, teas, sport drinks, energy drinks, coffee, and even alcoholic beverages. It also refreshed its flagship sodas with sugar-free versions, variable serving sizes, and new flavors to attract new customers.
In 2023, Coca-Cola’s organic revenue and comparable earnings per share (EPS) grew 12% and 8%, respectively. For 2024, it expects its organic revenue to rise 8%-9% as its comparable EPS increases 4%-5%. At $62 a share, Coca-Cola still looks reasonably valued at 22 times forward earnings. It also pays a forward dividend yield of 3.1% — which means a $10,000 investment today would generate about $310 in extra annual income.
2. Realty Income
Realty Income is one of the world’s largest real estate investment trusts (REITs). It owns 15,450 properties worldwide, and its top tenants include resilient retailers like 7-Eleven, Dollar General, and Walmart. It’s kept its occupancy rate above 96% over the past three decades, it pays monthly dividends, and it has raised its payout 124 times since its initial public offering in 1994. It’s also consistently grown its adjusted funds from operations (FFO), even through several economic downturns.
As a REIT, Realty Income needs to pay out at least 90% of its taxable earnings as dividends to maintain a favorable tax rate. With a forward dividend yield of 5.9%, it’s currently squeezing out about $590 per year in income from a $10,000 investment. At $53 a share, it looks historically cheap at 13 times last year’s adjusted FFO.
Realty Income, like other REITs, struggled as rising rates made it more expensive to take on debt and purchase new properties. But as those rates decline, investors should rotate back toward Reality Income and other well-run REITs.
3. Philip Morris International
Philip Morris International, one of the world’s largest tobacco companies, was spun off from Altria (NYSE: MO) in 2008. After that split, Phillip Morris focused on expanding into higher-growth overseas markets as Altria streamlined its business to just the U.S.
Phillip Morris and Altria are both grappling with declining smoking rates, and they’re both offsetting that pressure by cutting costs and raising their prices. Yet Phillip Morris has expanded more rapidly into non-smoking products than Altria over the past decade. Its robust sales of IQOS devices, which electrically heat up tobacco sticks instead of burning them, have been offsetting its weaker sales of traditional cigarettes. It’s also been selling more snus, chewing tobacco, and nicotine pouches to complement that shift.
Phillip Morris’ revenue and adjusted EPS grew 8% and 11%, respectively, in 2023. Analysts expect both its revenue and adjusted EPS to increase by about 5% in 2024. At $102 a share, it trades at just 17 times forward earnings — so its forward yield of 5.1% will add $510 to your annual dividend income. The company has also raised its payout every year since its split with Altria.
Should you invest $1,000 in Coca-Cola right now?
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Leo Sun has positions in Philip Morris International and Realty Income. The Motley Fool has positions in and recommends Realty Income and Walmart. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
The Smartest Dividend Stocks to Buy With $10,000 Right Now was originally published by The Motley Fool
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