Coca-Cola vs. PepsiCo: Which Is the Better Income Stock?

Out of almost 54,000 publicly traded stocks in the world, just 55 have achieved "Dividend King" status by raising their dividend for at least 50 years running. That means barely one in 1,000 companies have made the cut, and there are several reasons why it's so rare. To achieve this milestone, a company must be highly resilient, innovative, and able to succeed amid all kinds of market conditions.

Both PepsiCo (NASDAQ: PEP) and Coca-Cola (NYSE: KO) are members of this vaunted club. Coca-Cola has increased its dividend for a whopping 63 years, while PepsiCo just announced its 53rd annual dividend hike. Both increases were almost the same, with PepsiCo's increase being 5%, while Coca-Cola's was 5.2%.

Despite these nearly identical increases, the two companies offer very different prospects for income investors. Which is the better income stock going forward? Here's what the numbers say.

Image source: Getty Images.

Only one has protected from the "thief that robs us all"

Inflation is known as "the thief that robs us all," as it reduces purchasing power no matter who you are. If a company's dividend "increases" are lagging inflation, then they are increases in name only, as your supposedly growing income stream buys less and less each year.

This is why I always compare an income stock's track record of increases against the inflation rate. And when it comes to these two "Dividend Kings," only one of these stocks has been keeping ahead of inflation lately.

Since 2020, inflation has come in at about 25%. Over those five years, Coca-Cola's dividend has gone from $0.41/share to $0.51/share, a 24.4% increase that slightly lags the inflation rate. That's not devastating, and the race between Coca-Cola's dividend growth and inflation was a photo finish. Still, it's not what income investors were hoping for.

On the other hand, PepsiCo's dividend increased in that time frame from $0.955/share to $1.423/share. That 49% increase is almost double the rate of inflation. Of course, past performance doesn't reliably indicate future results. So, might Coca-Cola's dividend make a comeback?

Why PepsiCo's dividend has far more room to run

At first glance, there's a major asterisk around PepsiCo's dividend. Its payout ratio, the percentage of net income going toward sustaining the dividend, is a whopping 105%. That means it would have to take on more debt, or sell off assets, to maintain payouts at this current level of earnings.

However, earnings can be significantly impacted by acquisitions, such as PepsiCo's $2 billion purchase of the prebiotic soda Brand Poppi last May. So a better indicator of the sustainability of its dividend is to compare the amount of dividends paid against cash flow from operating activities.

Cash flow from operating activities is the cash a company generates from selling goods and services minus the payments made to suppliers and vendors, salaries, and interest and income tax payments. After a company keeps the lights on, it's the money remaining to pay for dividends, share buybacks, or acquisitions.

In PepsiCo's case, it generated $5.47 billion in cash flow from operating activities in the first nine months of 2025, compared to $3.65 billion for Coca-Cola.

Next quarter, PepsiCo will pay out $1.95 billion in dividends, compared to $2.19 billion paid out by Coca-Cola for the quarter. PepsiCo is therefore devoting just 36% of cash flow from net operating activities to cover its dividend, compared to 60% for Coca-Cola. That's an almost two-to-one difference, and it goes a long way toward explaining why PepsiCo's dividend growth has been much more robust in recent years.

For now, PepsiCo pays a yield of 3.9% compared to 2.9% for Coca-Cola. For investors who act today, I would expect the gap in yield on cost to grow over time, as PepsiCo grows its dividend at a faster clip. While both stocks are solid income plays that offer yields well above the S&P 500 average, PepsiCo is clearly the better play, both for its superior yield and prospects for faster dividend growth in the years ahead.

William Dahl has positions in Coca-Cola. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.