2024-01-18 18:00:00 ET
Summary
- Due to limited budgets, private investors need to carefully select the companies they choose to invest in. Today, I will introduce you to two attractive candidates that you could consider.
- Both companies not only pay an attractive Dividend Yield [FWD] of 3.05% and 9.30%, they also provide investors with dividend growth.
- Moreover, both have an attractive Valuation, providing you with a margin of safety when investing.
- Additionally, each can strongly contribute to reducing the volatility of your investment portfolio, evidenced by their 24M Beta Factors of 0.51 and 0.14.
- Both companies are already part of The Dividend Income Accelerator Portfolio, one as an individual position, and the other as an indirect investment due to the portfolio’s stake in SCHD.
Investment Thesis
Private investors have limited budgets, meaning that they have a restricted amount of money available for monthly investments.
For this reason, in today’s article, I will provide you with two companies which I believe are presently particularly attractive for investors, especially for those seeking to blend dividend income with dividend growth.
I consider both Coca-Cola (NYSE: KO ) and British American Tobacco (NYSE: BTI ) to be presently attractive investment options due to their attractive Dividend Yield [FWD] of 3.05% and 9.30% respectively, their impressive track record of dividend growth, their strong competitive advantages, and financial health (reflected in their A1 and Baa2 credit rating from Moody’s and their high EBIT Margin [TTM] of 28.88% and 48.10% respectively).
In addition to that, both companies exhibit an appealing Valuation (both presently exhibit a P/E [FWD] Ratio that stands below their 5 Year Average), indicating that they are currently attractive investment options, allowing you to invest with a margin of safety.
While I have already included British American Tobacco into The Dividend Income Accelerator Portfolio (it presently represents 3.48% of the overall portfolio), I am planning to include Coca-Cola within the following weeks. It is worth mentioning that through the portfolio’s stake in Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ), it is already indirectly invested in Coca-Cola. The company presently accounts for 1.45% of the overall portfolio.
It is further worth highlighting that both Coca-Cola and British American Tobacco are also part of my private investment portfolio, and I plan to benefit from the steadily increasing dividend payments of the companies while maintaining a long-term investment approach with a reduced risk level. This provides my private portfolio with an elevated chance of positive investment results.
In addition to the above, it should be mentioned that by including Coca-Cola and British American Tobacco into your investment portfolio, you can reduce portfolio volatility. This is evidenced by the companies’ 24M Beta Factor of 0.51 (Coca-Cola) and 0.14 (British American Tobacco).
The implementation of a portfolio with a reduced volatility is important to provide you with more stability and control over your financials, which is important for your long-term investment success. For this reason, both Coca-Cola and British American Tobacco can be important strategic acquisitions for your portfolio during this month of January.
Before diving deeper into these two companies, I would like to repeat the general benefits of including high dividend yield companies into your investment portfolio.
General Benefits of Investing in High Dividend Yield Companies
- The Generation of Income: Dividend paying companies bring you the enormous benefit of helping you to produce income. This provides you with much higher financial flexibility and offers the enormous benefit of not having to sell some of your stocks when you might need some extra money at a time when the market is not in your favor.
- Significant Reduction of the Volatility and Risk Level of Your Overall investment Portfolio: Companies that pay a relatively high and particularly sustainable dividend, tend to come attached to a lower risk level, particularly when compared to growth companies, thus contributing to reducing the volatility and overall risk level of your investment portfolio (their lower risk level can be reflected in their lower Beta Factor).
- Psychological Investor Benefits in Times of a Stock Market Decline: In times of high volatility and declining stock markets, receiving dividend payments can bring you a psychological effect that can lead you to keep the positions in your portfolio to continue benefiting from dividend payments, acting like a business owner, instead of a stock market trader. This behavior can help you to significantly increase your wealth over the long term.
It should be noted that the identification of sustainable dividend paying companies is of high importance for investors. Companies that pay sustainable dividends provide us with a higher chance of positive investment outcomes (since the likelihood of a dividend cut is reduced when compared to companies that provide high dividend yields, but do not pay sustainable dividends).
Therefore, in my investment analysis, I particularly aim to identify those companies that pay sustainable dividends, increasing the chances for you as an investor to reach an attractive Total Return.
In this article, I will demonstrate why I believe that both Coca-Cola and British American Tobacco should be able to deliver investors with sustainable dividends, helping to generate a constant and steadily increasing amount of extra income via dividends while investing with a lowered level of risk.
Coca-Cola
When evaluating companies with the most significant economic moat globally, Coca-Cola ranks among them. The company’s significant competitive advantages include a strong brand image, an extensive global distribution network and a broadly diversified product portfolio, in addition to a strong financial health (evidenced by an A1 credit rating from Moody’s and an EBIT Margin [TTM] of 28.88%).
Coca-Cola’s Current Dividend
Coca-Cola presently pays a Dividend Yield [FWD] of 3.05%. The company’s Annual Payout [FWD] stands at $1.84.
It is worth highlighting that Coca-Cola has shown an impressive 61 Consecutive Years of Dividend Growth, which indicates that the company is an excellent pick for dividend income investors who want to benefit from its steadily increasing dividend payments. For these reasons, Coca-Cola is also part of my personal investment portfolio.
Coca-Cola’s Payout Ratio of 68.68% indicates that the company’s dividend should be relatively safe within the coming years. This theory is further reinforced by its EPS Diluted Growth Rate [FWD] of 6.54% and 5 Year Dividend Growth Rate [CAGR] of 3.36%.
The graphic below shows the Consensus Dividend Estimates for Coca-Cola and underlines my theory that the company is an excellent pick for dividend income investors: Consensus Dividend Estimates are 3.17% for 2024 and 3.34% for 2025.
Coca-Cola’s Current Valuation
Presently, Coca-Cola exhibits a P/E [FWD] Ratio of 24.43, which stands 3.44% below its 5 Year Average of 25.30. This metric shows that the company is presently slightly undervalued.
This undervaluation is further confirmed when having a look at Coca-Cola’s Price/Sales [FWD] Ratio of 5.75, which is 6.71% below its average from the past 5 years. The same is confirmed when considering the company’s Price/Cash Flow [FWD] Ratio of 21.88, which is 8.59% below its 5 Year Average.
Coca-Cola’s Internal Rate of Return as According to my DCF Model
At Coca-Cola’s current stock price of $60.39, my DCF Model indicates an intrinsic value of $64.42 for the company. This implies an upside of 6.7%.
Below you can find the Internal Rate of Return for Coca-Cola as according to my DCF Model. At the company’s current stock price of $60.39, my DCF Model indicates an Internal Rate of Return of 8.9%, underlying my investment thesis that Coca-Cola could be an attractive addition to your investment portfolio during this month of January.
Hypothetical Purchase Price for the Coca-Cola Stock | Internal Rate of Return as according to my DCF Model |
$50.00 | 13.0% |
$52.50 | 11.9% |
$55.00 | 10.9% |
$57.50 | 9.9% |
$60.39 | 8.9% |
$62.50 | 8.1% |
$65.00 | 7.3% |
$67.50 | 6.5% |
$70.00 | 5.7% |
Source: The Author
Coca-Cola’s Strong Profitability Metrics
Coca-Cola’s strong profitability metrics underline the company’s excellent position within its industry. Coca-Cola has a Gross Profit Margin [TTM] of 59.14%, which stands 77.36% above the Sector Median, and a Net Income Margin [TTM] of 23.92%, standing 386.72% above the Sector Median. This indicates that the company reaches significantly higher margins than its competitors.
Coca-Cola According to the Seeking Alpha Quant Ranking
The results of the Seeking Alpha Quant Ranking underline that Coca-Cola is an attractive pick at this moment in time, underlying my investment thesis. The company is ranked 1 st out of 14 within the Soft Drinks & Non-alcoholic Beverages Industry, 1 st out of 184 within the Consumer Staples Sector, and 28 th out of 4561 within the Overall Ranking.
Source: Seeking Alpha
Coca-Cola in Comparison to its Competitor PepsiCo
When comparing Coca-Cola to its main competitor PepsiCo (NASDAQ: PEP ), it can be highlighted that Coca-Cola pays the slightly higher Dividend Yield [FWD] of 3.05% (compared to PepsiCo’s 3.03%) and is the slightly superior choice in terms of Profitability (EBIT Margin [TTM] of 28.88% compared to 14.59%).
However, it should be mentioned that PepsiCo is the slightly superior choice when it comes to dividend growth, evidenced by its 5 Year Dividend Growth Rate [CAGR] of 6.63% (compared to Coca-Cola’s 3.36%).
It is further worth highlighting that PepsiCo provides investors with the broader product portfolio, particularly due to its presence in the snack food industry (while Coca-Cola exclusively operates within the Soft Drinks & Non-alcoholic Beverages Industry).
British American Tobacco
British American Tobacco was founded in 1902 and offers tobacco and nicotine products all around the world. The company has a broad portfolio of products, including brands such as Dunhill, Kent, Lucky Strike, and Pall Mall.
British American Tobacco’s Current Valuation
Due to British American Tobacco’s latest stock price decline as a consequence of a $31.5B write down of its cigarette brands , it currently provides investors with an attractive Valuation. The company’s P/E [FWD] Ratio presently stands at a low level of 7.10, which is 26.10% below its 5 Year Average.
British American Tobacco’s Price/Sales [FWD] Ratio stands at 1.89, being 16.57% below its 5 Year Average, further confirming the company’s undervaluation.
British American Tobacco’s Internal Rate of Return as According to my DCF Model
At British American Tobacco’s current share price of $30.14, my DCF Model indicates an intrinsic value of $36.11. This implies an upside of 19.8%. Below you can find hypothetical purchase prices for the British American Tobacco stock and their respective Internal Rate of Return as according to my DCF Model.
At its current share price of $30.14, my DCF Model indicates an Internal Rate of Return of 12.9%, indicating that the company is an attractive investment option and that the reward (in form of the Internal Rate of Return) can be attractive for investors.
Hypothetical Purchase Price for the British American Tobacco Stock | Internal Rate of Return as according to my DCF Model |
$26.00 | 15.2% |
$27.00 | 14.6% |
$28.00 | 14.1% |
$29.00 | 13.5% |
$30.14 | 12.9% |
$31.00 | 12.5% |
$32.00 | 12.0% |
$33.00 | 11.5% |
$34.00 | 11.0% |
Source: The Author
British American Tobacco’s Dividend and its Combination of Dividend Income and Dividend Growth
At British American Tobacco’s current share price of $30.14, it pays a Dividend Yield [FWD] of 9.30%. The company’s appealing Dividend Yield, its Dividend Payout Ratio [FY1] [Non GAAP] of 64.08% in combination with its 10 Year Dividend Growth Rate of 2.85% indicates that it effectively combines dividend income and dividend growth, making the company an excellent fit for those investors seeking to combine both factors.
The Projection of British American Tobacco’s Dividend and its Yield on Cost
The graphic below shows a projection for the company’s Dividend and Yield on Cost. In this projection, an Average Dividend Growth Rate of 2% is assumed for the next 30 years.
Considering the company’s current stock price of $30.14, the graphic indicates a potential Yield on Cost of 11.61% for 2034, 14.15% for 2044 and 17.25% for 2054.
Even though I agree with those that claim that a projection of the company’s dividend for the following 30 years is hard to predict, the graphic aims to illustrate the benefits of investing in British American Tobacco over the long term instead of speculating over the short term. This follows my long-term investment approach, which is also reflected in The Dividend Income Accelerator Portfolio.
Risk Analysis
A risk analysis of a stock is crucial for investors, since a company with a low risk level offers an enhanced probability of delivering successful investment outcomes. On the other hand, companies with a high risk level often tend to present a reduced chance of favorable investment returns. This is mainly because they are subject to more uncontrollable factors, thus reducing the prospects for attractive investment results.
For these reasons, The Dividend Income Accelerator Portfolio prioritizes companies with an attractive risk-reward profile.
Risk Analysis – Coca-Cola
Key Risk Factors for Coca-Cola Investors to Consider
- Intense Competition with competitors: The company’s intense competition with companies such as PepsiCo and Nestle (NSRGY), both of which boast strong brands in their product portfolio, poses a significant risk. This competition can influence Coca-Cola’s financial performance, presenting a considerable risk factor for investors.
- A possible dividend cut: A dividend cut could have a strong impact on Coca-Cola’s stock price, which is a risk factor for potential investors. However, the likelihood of such a cut appears to be relatively low. This assessment is based on Coca-Cola's sustainable Payout Ratio of 68.68%, in combination with its impressive 61 Consecutive Years of Dividend Growth and 5 Year Dividend Growth Rate [CAGR] of 3.36%. It is also based on the company’s EPS Diluted Growth Rate [FWD] of 6.54%, which indicates healthy financial prospects.
Reducing Portfolio Risk When Investing in Coca-Cola for Improved Investment Outcomes: The Case for a 5% Allocation Limit and for a Long-Term Investment Approach
When considering adding Coca-Cola to your portfolio, I recommend investing with a long-investment horizon. An investment horizon of at least 7 years helps you to continuously benefit from the company’s dividend enhancements.
Due to having a relatively low level of investment risk and a positive growth outlook (reflected in its EPS Diluted Growth [FWD] of 6.54%), I suggest overweighting Coca-Cola in a long-term investment portfolio: Coca-Cola offers investors an attractive risk/reward profile, thus increasing my confidence to overweight the company.
However, to achieve a reduced company-specific concentration risk for your overall investment portfolio, I suggest that you limit the Coca-Cola position in comparison to your overall portfolio to a maximum of 5%. I have been following this approach with my private investment portfolio and will implement the same strategy with The Dividend Income Accelerator Portfolio.
Risk Analysis – British American Tobacco
Key Risk Factors for British American Tobacco Investors to Consider
There are several risk factors you should consider before taking the decision to invest in British American Tobacco. One of which is the currency risk, as fluctuations in exchange rates could significantly negatively impact the financial performance of the company.
Another risk factor for investors of British American Tobacco is a potential dividend reduction, which would have an adverse impact on the company’s stock price.
Nevertheless, given the company’s history of dividend growth, its 5 Year Average EPS Diluted Dividend Growth Rate [FWD] of 4.02% and its Dividend Payout Ratio [FY1] [Non GAAP] of 64.08%, I believe that the likelihood of a dividend cut is low.
However, I will monitor the company’s results within the following quarters and years, in order to ensure a continued reduced likelihood of a dividend cut.
The limited growth perspective for the company (evidenced by its 5 Year Average Revenue Growth Rate [FWD] of 0.33%, and its EBIT Growth Rate [FWD] of 1.76%), contribute to the fact that I suggest limiting the proportion of British American Tobacco in relation to the overall portfolio to a maximum of 4%, ensuring a reduced company-specific concentration risk.
My recommendation not to invest more than 10% of your overall portfolio into the Tobacco Industry further helps us to maintain a reduced industry-specific concentration risk. I am following and implementing this approach both with my private investment portfolio and with The Dividend Income Accelerator Portfolio.
Maximizing Investor Benefits when Investing in British American Tobacco and Coca-Cola
I firmly believe that integrating stocks such as Coca-Cola and British American Tobacco in a portfolio that combines dividend income and dividend growth can be extremely beneficial for investors.
Such an investment approach is reflected by my private investment portfolio and by The Dividend Income Accelerator Portfolio, which I share transparently on Seeking Alpha. Both portfolios are characterized by a reduced level of risk and a strategical combination of dividend income and dividend growth.
Such portfolios not only offer a balanced approach, but also increase the likelihood of successful investment outcomes due to their lower level of risk. Implementing such a portfolio can help you to steadily increase your wealth, due to the continuous dividend enhancements from its constituent companies, and the achievement of an attractive Total Return.
The Reasons for Having Incorporated British American Tobacco Into The Dividend Income Accelerator Portfolio
I have included British American Tobacco into The Dividend Income Accelerator Portfolio for a variety of reasons, including its attractive Valuation, attractive combination of dividend income (Dividend Yield [FWD] of 9.30%) with dividend growth (5 Year Dividend Growth Rate [CAGR] of 2.46%), its strong competitive advantages, and attractive Dividend Payout Ratio [FY1] [Non GAAP] of 64.08%, which indicates that there is scope for dividend enhancements.
At this moment in time, British American Tobacco represents 3.48% of The Dividend Income Accelerator Portfolio, following my suggestion to provide the company with a proportion of the overall portfolio that does not exceed 4%. This helps to maintain a low level of company-specific concentration risk for The Dividend Income Accelerator Portfolio. The article below explains in greater detail the present composition of The Dividend Income Accelerator Portfolio:
Combining Strengths: 2 Undervalued Market Leaders For Balanced Dividend Income And Dividend Growth
The current allocation of The Dividend Income Accelerator Portfolio underlines my commitment to practicing what I preach, evidenced by the alignment of my investment recommendations and the transparent implementation of my portfolio strategies.
The article below explains in greater detail the reasons for which I have incorporated British American Tobacco into The Dividend Income Accelerator Portfolio, comparing in greater detail British American Tobacco with its competitor Altria:
British American Tobacco Vs. Altria: Which Is The Better Dividend Choice?
Why Coca-Cola Is an Attractive Candidate for Potential Inclusion Into The Dividend Income Accelerator Portfolio
Due to Coca-Cola’s attractive Dividend Yield [FWD] of 3.05, its strong track record of dividend growth (61 Consecutive Years of Dividend Growth), its sustainable Payout Ratio of 68.68%, the company’s positive growth outlook (evidenced by its EBIT Growth Rate [FWD] of 7.84%), and strong competitive advantages (such as its strong brand image, broad distribution network and strong financial health), it is also an attractive candidate for potential inclusion into The Dividend Income Accelerator Portfolio.
Presently, The Dividend Income Accelerator Portfolio is already invested in Coca-Cola due to having a stake in SCHD. At this moment in time, SCHD represents 37.64% of the overall portfolio of The Dividend Income Accelerator Portfolio. Since Coca-Cola currently represents 3.86% of SCHD, the proportion of Coca-Cola in relation to the overall portfolio stands at 1.45%.
Within the following weeks, I plan to add Coca-Cola as an individual position to The Dividend Income Accelerator Portfolio, providing the company with a higher proportion compared to the overall portfolio than it has right now.
I would further like to highlight that I plan to provide Coca-Cola with no more than 5% of the overall portfolio (considering both the direct investment and the indirect investment via SCHD), following my allocation limit suggestion for the company as mentioned previously.
Following this approach will allow us to maintain a reduced company specific concentration risk for The Dividend Income Accelerator Portfolio, helping us to reach positive investment results with a high probability.
Conclusion
I am convinced that both Coca-Cola and British American Tobacco can be excellent additions to your investment portfolio. I believe that both are attractive options for anybody planning to add additional companies to their portfolio during this month of January.
Both Coca-Cola and British American Tobacco exhibit an attractive Valuation, combine dividend income and dividend growth, and have strong competitive advantages (such as their strong brand image, broad product portfolio, and financial health).
Furthermore, you can significantly reduce the volatility of your investment portfolio by including both companies. This theory is evidenced by Coca-Cola and British American Tobacco’s 24M Beta Factor of 0.51 and 0.14.
Moreover, I am convinced that both companies should be able to provide you with sustainable dividends, which implies a reduced risk level for a dividend cut, and an increased likelihood of reaching an attractive Total Return. This also ensures that you receive increased dividend payments on an annual basis.
The sustainability of Coca-Cola and British American Tobacco’s dividends are evidenced by their strong track record of dividend growth, their EPS Diluted Growth Rate [FWD] of 6.54% and 1.62% respectively, and their Dividend Payout Ratio [FY1] [Non GAAP] of 68.39% and 64.08% respectively. All of these factors raise my confidence that the companies’ dividends should be relatively safe within the following years.
British American Tobacco, directly included, and Coca-Cola, an indirect investment via SCHD, are strategic components of The Dividend Income Accelerator and my private investment portfolio.
As mentioned previously, I suggest limiting the proportion of Coca-Cola and British American Tobacco to a maximum of 5% and 4% in relation to your overall portfolio. Doing so ensures a reduced risk level while allowing you to achieve an attractive Total Return with an elevated probability.
I am following this allocation limit with both my private investment portfolio (in which British American Tobacco accounts for 0.34% of the overall portfolio and Coca-Cola 0.86%), and with The Dividend Income Accelerator Portfolio (in which British American Tobacco represents 3.48% of the overall portfolio, and Coca-Cola currently 1.45%).
This demonstrates that I am following and implementing my own suggestions, aiming to demonstrate maximum transparency for Seeking Alpha readers.
Author’s Note: Thank you for reading! I would appreciate hearing your thoughts on this investment article on British American Tobacco and Coca-Cola. Which high dividend yield companies are you considering investing in during this month of January?
For further details see:
If I Could Only Buy 2 High Dividend Yield Companies In January 2024 - One Yields Above 9%