Today we received a dividend payment from Coke (KO) in the amount of $37.03 (35 cents a share X 105.8 shares). We don’t have a DRIP setup for KO, so we just took the cash and used it for our regular monthly investments. It’s hard not to think about KO as a company that sells the popular soft drink called Coca-Cola but the truth is that KO is the world’s largest beverage company, serving up consumers with more than 500 sparkling and still brands and more than 3,800 beverage choices including 20 brands worth more than a $1 billion each in revenues. The next time you buy your favorite beverage in a convenience store, take a look on the label and see who distributes the product. In the majority of cases, it will be KO.
At the time of this dividend payment, KO is paying a +3.10% yield which is above our target of 3% yield on our entire Quantigence DGI Portfolio. A higher dividend yield on a popular DGI stock can imply that investors think the prospect for future dividend growth are slim. AT&T is a good example of such a stock. In order to gauge what sort of dividend increase we can expect from KO, it’s best to look at their past track record of dividend increases as seen below:
What we see is that the last dividend increase from KO was a +6.06% increase last year. This increase was not inline with KO’s 10-year average increase of 8.70%. In order to see what sort of buffer KO has to keep increasing their dividend, let’s look at their historical payout ratio:
We see that while KO has tried to keep their payout ratio below 60% over the years, it did spike back in 2000 and also in the past few years as well. The reason behind this can be seen in gradually falling revenues and net income:
We can also see that KO is taking on more and more debt over time as well. Should we be worried here? The answer is no. Do you really think that the world’s largest beverage company that has increased dividends for 54 years in a row, really be in any danger of not being able to grow your dividend over time? In all likelihood, KO will continue to increase their dividend for many years to come. That slowing dividend growth is also reflected in the gradually increasing yield over time.
We’re happy to sit on a stock with a 3% yield that is growing at 6% per year. This means that in 5 years our yield will hit 4% and in 9 years we’ll hit 5%. People are always going to be drinking beverages!