This Dividend King's Yield Has Never Been This High. Time to Buy, or Run Away?

Looking for a safe investment? It's often a good idea to start with companies that pay and raise dividends. These companies generally feature durable competitive advantages and the steady and profitable growth needed to send more cash to shareholders each year.

Companies that raise dividends long enough become Dividend Kings, legendary stocks with at least 50 years of uninterrupted dividend growth.

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PepsiCo (NASDAQ: PEP) is a famous example. The company has been selling iconic brands of snacks and drinks worldwide for generations. But things aren't as smooth at PepsiCo as they once were, and the market's grown wary enough to send the stock price lower and the dividend yield to all-time highs.

Abnormally high yields are often the market's way of signaling danger, trouble in a business. Can you trust PepsiCo's dividend now, and should investors buy the stock or run away?

Image source: Getty Images

PepsiCo's growth is slowing, and here's why

The company's sales surpassed $91 billion last year. It's incredible to think about how many beverages and bags of snacks you need to move for that much revenue. PepsiCo has two primary growth levers: it can sell more servings of drinks and snacks or charge more for them.

PepsiCo's iconic brands and premium shelf space in stores often afforded it pricing power, where it can slowly inch prices higher over time. However, inflation soared following the COVID-19 pandemic. According to data from the consumer price index, food prices rose approximately 25% from 2019 to 2023, far more than their historical pace.

Possible tariffs could also raise costs further. This has begun weighing on consumers, which prompted PepsiCo to cut its 2025 earnings forecast. Additionally, weight loss drugs, which work primarily by depressing patients' appetites, have become increasingly popular in America.

PepsiCo's food volumes dropped 1% last year and began 2025 with a 3% year-over-year decline in the first quarter. It's a tough spot for the company because trying to lean into price increases could drive even more buyers away.

Can investors trust the stock's abnormally high yield?

Entering last year, analysts anticipated PepsiCo growing its earnings by an average of about 8% annually over the long term. Those annualized growth estimates have fallen to under 4%, and the lower expectations have sent the stock lower, too.

Today, PepsiCo yields 4.2%, its highest ever. Heck, the stock hadn't yielded more than 3.6% until recently, so momentum has turned quickly and sharply against it:

PEP Dividend Yield data by YCharts

It's not ideal that PepsiCo paid $5.42 per share in dividends last year, but generated just $5.28 per share in free cash flow. Dividends are cash expenses, so PepsiCo couldn't afford its dividend with its cash profits.

Yet, the dividend will likely be fine. Generations of success have made PepsiCo a financial fortress, with $8.5 billion in cash and a sterling "A+" (investment grade) credit rating from S&P Global with a stable outlook.

In other words, PepsiCo's business isn't likely to fall off. It still dominates your local grocery store and should continue to grow. It just might grow slower than you're used to seeing.

Exploring PepsiCo's outlook

There's also a good chance PepsiCo will adapt over the coming years. CEO Ramon Laguarta said as much when an investor asked him about the impact of weight loss drugs during PepsiCo's Q1 2025 earnings call.

In the past year alone, the company has already begun acquiring emerging brands in strategic health and specialty categories, with Siete Foods and Poppi. PepsiCo could then turn around and sell brands it feels don't align with its strategy.

So, there's a decent chance that PepsiCo eventually makes changes to restart its growth engine. If not, it's still likely a fantastic dividend stock for income-focused investors looking for an above-average yield without taking on much risk. If that appeals to you, the stock is a solid buy.

Should you invest $1,000 in PepsiCo right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends S&P Global. The Motley Fool has a disclosure policy.