1 Magnificent S&P Dividend Stock Down 10% to Buy and Hold Forever

The best investment portfolios usually include at least a few dividend-paying stocks, and you can lock in a great yield by finding the ones representing great companies that are temporarily out of favor with investors. PepsiCo (NASDAQ: PEP) is one such company. This stalwart of the consumer staples sector has seen its share price drop over the past few months, but its long-term potential as a cash flow powerhouse is still compelling.

PepsiCo dropped while the market climbed

Since July 1, 2023, PepsiCo shares are trading down almost 11%. Over that same timeframe, the S&P 500 gained 16% while Coca-Cola (NYSE: KO) stayed roughly flat.

^SPX Chart

Pepsi’s stock is lagging for a few different reasons. The company has struggled with revenue and volume growth over the past year. It increased prices in reaction to rising costs, which hurt demand among price-conscious consumers who are struggling with inflation across the board.

Some of its distributors have raised concerns that the price hikes are excessive, so the company is unlikely to drive growth from additional price hikes moving forward. It needs to rely on rising unit volume to keep expanding, at least in the short term. Unfortunately, some investors are speculating that weight loss drugs could seriously curb the consumption of snack foods and that widespread use of those pharmaceuticals could hurt PepsiCo, along with its industry peers.

PepsiCo’s 10% stock price drop isn’t an enormous one, but it’s enough to warrant a look from income investors. If the recent concerns are overblown, then this could be an opportunity to lock in a long-term dividend stream at a more attractive yield.

Bowls of snack food and beverage glasses arranged on a table.

Image source: Getty Images.

PepsiCo is one of the most stable companies around

PepsiCo operates a business that isn’t exciting from a growth perspective, but it doesn’t have many rivals when it comes to stability. That should be a priority for dividend stocks, because those investments tend to thrive when the underlying business has predictable cash flow expansion.

There are dozens of household brand names under the PepsiCo umbrella, spanning various beverage, snack, and grocery categories. These include Frito-Lay, Quaker, Doritos, Gatorade, Smartfood, Sabra, and others that most people don’t even realize fall under the PepsiCo umbrella. Its Frito-Lay and Quaker divisions accounted for more than half of its North American revenue last year, so the product diversification is meaningful financially. Contrary to what people might think, PepsiCo isn’t just a rival to Coca-Cola — it has a unique and broad product portfolio.

PepsiCo is also geographically diversified, with a presence in more than 200 countries around the world. It still has heavy concentration in North America, which accounts for nearly 60% of total company revenue, but this is a truly global business that doesn’t depend on any one nation’s economy to prosper.

A cash flow machine

PepsiCo is a Dividend King with 51 consecutive years of dividend growth. The stock currently sports a 3% yield after raising its quarterly dividend to $1.265 per share. Over the past decade, the company’s revenue and cash flows have slowly marched higher, with an average annual growth rate in the 3% to 5% range.

PEP Revenue (TTM) Chart

PEP Revenue (TTM) Chart

PepsiCo’s dividend payout ratio of 73% has been somewhat volatile in recent years, which could cast doubt on its ability to continue raising its dividend if sales growth struggles with macroeconomic headwinds. That’s something to monitor moving forward, but the company generated $1 billion more free cash flow than it distributed to shareholders last year.

If the broader economy keeps improving over the next year or two, PepsiCo is likely to deliver suitable financial results. The company is forecasting 4% revenue growth and 8% earnings growth in 2024, after adjusting for the effect of currency fluctuations, acquisitions, divestitures, and additional reporting weeks that occur every fifth or sixth fiscal year.

Fundamental performance over the past two years makes the divergence from Coca-Cola look exaggerated. On a percentage basis, PepsiCo has nearly kept pace with its rival on the top line, and it compares favorably when it comes to earnings, cash flow, and dividends.

PEP Revenue (TTM) Chart

PEP Revenue (TTM) Chart

PepsiCo isn’t immune from challenges moving forward, but it’s a dividend powerhouse with a diverse business and strong competitive position that contributes to reliable cash flows. Its 3% yield at the moment because of a reduced stock price is a compelling reason for long-term income investors to consider buying in.

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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

1 Magnificent S&P Dividend Stock Down 10% to Buy and Hold Forever was originally published by The Motley Fool