One great reason to love dividend stocks is that they offer purely passive income. Simply adding a few of these investments to your portfolio lets you to benefit from regular quarterly payments that also tend to rise with each passing year.
The hard part is picking the right stocks. You want a good balance between growth and income. A high yield is important, too, but not so important that you invest in sub-par businesses. Ideally, the dividend stocks you own will deliver both steadily growing income and a rising share price.
Coca-Cola (KO -0.22%) and McDonald’s (MCD -0.44%) both fit that bill today. And by investing $16,000 roughly evenly between the two blue chip companies, you can get some diversity while generating an immediate $400 of annual income. Let’s look at a few reasons why they make ideal candidates for income investors right now.
1. Coca-Cola: Growing strong
Coca-Cola stock is a rare case of a strong, growing business that’s priced at a discount. The beverage giant’s last earnings report showed a healthy 11% sales increase that was powered by both rising prices and increased volumes. Coke took the opportunity in late October to hike the company’s 2023 outlook on both the top and bottom lines.
The business is highly profitable as well, turning roughly 30% of revenue into operating profit each year. Cash flow is just as strong. Coke produced $8 billion of free cash flow over the last nine months, providing ample resources that management can direct toward stock buybacks, dividend payments, and growth initiatives.
And yet the dividend stock has missed out on the 2023 market rally. Shares are down 8% through early December, in fact. That trend means income investors can get a cool 3.1% yield from simply owning this business today.
2. McDonald’s: Cashing in
You’ll be just as pleased to have McDonald’s in your portfolio for the long term. It’s true that the fast-food titan reported a slight customer traffic decline in the U.S. market last quarter. But overall global traffic was up and comparable-store sales growth was robust at 9%.
In a competitive market, McDonald’s continues to win market share through the popularity of core menu items like the Big Mac, as well as relatively newer additions like the McCrispy chicken sandwich. Diners are loving the chain’s lower-priced options and convenient delivery, drive-thru, and eat-in choices.
“We continued to deliver convenience and value for our customers,” CEO Chris Kempczinski said in a late October press release.
Management’s long-term goals include significantly boosting Mickey D’s store footprint by 2027. Operating profit margin should keep rising toward 50% of sales, executives predict, thanks to positive factors like sales volume growth and more efficient operations. Income investors will likely enjoy owning the stock as McDonald’s makes progress on these points.
And they can collect a solid dividend while they wait. McDonald’s stock pays a yield today of 2.3%, or just a bit less than Coke’s roughly 3%. Own a mix of the two stocks and your effective yield is closer to 2.5%. That’s a solid bonus to have on your side for two businesses that are likely to expand on their already dominant market positions over the next several years.
