Coca-Cola Is the Most Boring Stock I Own. After 64 Years of Dividend Raises, I'll Never Sell.
Key Points
Coca-Cola’s scale and diversification have insulated it from economic downturns.
Its capital-light model will enable it to remain a Dividend King for decades.
Coca-Cola (NYSE: KO), the world's largest beverage company, isn't an exciting stock to own. In fact, it's probably the most boring stock I own. Yet Coca-Cola still accounts for nearly 5% of my portfolio; it's my fourth-largest holding, and I don't plan to sell it for three simple reasons.
1. It's a Dividend King
If a company raises its dividend annually for 50 consecutive years, it becomes a Dividend King. Coca-Cola, with 64 consecutive years of dividend hikes, belongs to that exclusive club.
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Over the past five decades, the U.S. has experienced six official recessions, and the S&P 500 (SNPINDEX: ^GSPC) has experienced five bear markets (a decline of at least 20% from its previous peak). Coca-Cola's ability to grow its earnings and dividends through those downturns indicates it's an evergreen income play for long-term investors.
Coca-Cola's forward yield of 2.3% might seem unimpressive compared to the 10-Year Treasury's 4.9% yield, but its stock has more upside potential than fixed income plays. Its low trailing payout ratio of 62% also gives it plenty of room for future dividend hikes.
2. Its business model is resilient
In addition to its flagship carbonated drinks, Coca-Cola sells bottled water, teas, fruit juices, energy drinks, sports drinks, dairy products, coffee, and even alcoholic beverages. It has also refreshed its sodas with new flavors, healthier versions, and smaller serving sizes. That's why Coca-Cola kept growing even as soda consumption rates declined across the world.
To maintain high gross margins, Coca-Cola sells only concentrates and syrups to its bottling partners, which manufacture and distribute the finished drinks. That capital-light model enables it to generate plenty of cash to cover its dividends. Over the past 12 months, it spent 79% of its free cash flow (FCF) on its dividends. Its rival PepsiCo (NASDAQ: PEP) operates at lower margins because it bottles its own drinks and sells packaged foods.
3. It generates impressive long-term gains
Over the past 30 years, Coca-Cola delivered a total return of 720% when reinvested dividends are included. It didn't outperform the S&P 500's total return of 1,750%, which was inflated by the recent growth spurt in AI-driven tech stocks, but it beat many other slower-growth blue chip stocks.
Coca-Cola might struggle to stay ahead of the market over the next few years, but those returns should smooth out over the next few decades. That's why it's still a great stock to buy, hold, and forget for investors who don't want to lose any sleep over their investments.
Leo Sun has positions in Coca-Cola. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.