If your goal is to invest in dividend stocks and earn passive income, these three companies are top candidates for lifelong income. But first you need to know what dividend stocks to avoid.
Investing in Dividend Stocks Creates Passive Income, But Beware
Not all dividend stocks are created equal. It can be easy to fall victim to dividend traps: unsustainable payouts, with too-good-to-be-true dividend yields.
Instead of focusing solely on the dividend yield, take a look at the company’s payout ratio and total debt. Invest in solid companies that offer reliable dividend payouts — that’s the best strategy when aiming to create passive income for years, if not decades.
To help mitigate risk, focus on companies with a history of dividend hikes. These hikes showcase companies with proven business models and management teams that prioritize dividend increases, much like these three Dividend Kings.
Genuine Parts (GPC)
The future is bright for Genuine Parts. The cost of new cars continues to rise in response to tighter emission rules, stricter safety requirements, and the move to electric vehicles. So, as new cars become more expensive, consumers will invest in older vehicles, benefiting those that supply parts.
Similarly, the economic climate favors Genuine Parts. It is a business that tends to do well during these periods of economic downturn. If money is tight, consumers will look for ways to keep their existing car running instead of pouring tens of thousands into a new one.
From a valuation perspective, Genuine Parts has upside to $165.62 using a cash flow analysis, and it pays a handsome 2.37% yield. This is a dividend stock that should continue generating passive income for years to come.
Like its arch-rival, Coca-Cola, PepsiCo regularly reports healthy profits and an abundance of cash flow. The company currently pulls in revenue from around the globe, 56% of which comes from the United States.
A closer look at PepsiCo’s finances shows the company’s top line has continued to expand over the years, reaching more than $79 billion in 2021 — up 13% from 2020. Free cash flow was over $7.1 billion, and core operating profit hit more than $11.4 billion.
The revenue breakdown is 55% from convenience foods and 45% from beverages. In addition to globally recognized beverages, PepsiCo owns several well-established brands, including Quaker Oats, Gatorade, Lay’s, and Doritos. These brands have a strong presence in supermarkets, so the need to pour a lot of resources into brand awareness is minimal.
PepsiCo paid over $5.8 billion in dividends last year; a change of 6% compared to the previous year. Similar to Genuine Parts, it has about 10.1% upside potential on a valuation basis.
Not only can you plan on Coca-Cola paying dividends for a long time, but also regularly increasing that payout per share. For example, in 2012, the dividend per share was $1.02; in 2021, it was $1.68.
Coca-Cola’s healthy operating and profits margins are more reasons to buy. In 2021, the company reported net operating revenue of $38.6 billion, a gross profit of $23.2 billion, and an operating income of $10.3 billion. Even rampant inflation won’t stop Coca Cola from paying dividends annually, and that’s exactly what you want if you’re betting on a company to pay income for life.