3 Reasons Why Coca-Cola Is Still a Top Dividend Stock for Generating Passive Income

Key Points

• Coke continues to generate organic growth despite a highly challenging operating environment.

• The company is adapting to changing consumer preferences and regulatory pressure by offering Coke made with U.S. cane sugar instead of corn syrup.

• Coke has a growing and affordable dividend with a competitive yield.

• 10 stocks we like better than Coca-Cola ›

Some top stocks are known for their growth potential, while others are recognized for their predictability. Coca-Cola (NYSE: KO) is in that second camp.

The company isn't perfect, and its results have been disappointing in some periods. But through it all, one constant that investors have been able to count on is Coke's rock-solid dividend.

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Coke is unique because it has a high yield at 3% and it has an extensive track record of increasing its payout. It has done so for 63 consecutive years, earning it a spot on the list of Dividend Kings.

Here's why Coke remains a great buy for investors looking to boost their passive income.

Image source: Getty Images.

1. Delivering solid results

Coke reported a good second quarter on July 22. The company grew organic revenue by 5%, comparable earnings per share (EPS) by 4%, and comparable operating margins rose to 34.7% versus 32.8% for the second quarter of 2024.

For the full year, Coke expects organic revenue growth of 5% to 6%, comparable currency-neutral EPS of 8%, and comparable EPS of $2.88. So currency headwinds are really throwing a wrench in Coke's results and detracting from the strength of the underlying business.

Coke's resilient results didn't get a big reaction from Wall Street, but that may be because Coke is up around 11% on the year, which is slightly better than the gain for the S&P 500 (SNPINDEX: ^GSPC).

Coke has been a standout in what has otherwise been a challenging consumer staples sector -- especially for packaged food and beverage and snack companies. Many food and beverage stocks are at multiyear, if not multidecade, lows. Inflation and relatively high interest rates have been hitting consumer demand hard for everyday household goods. When the cost of these goods go up, it affects all consumers, but especially those with less discretionary income.

Another challenge is changes in consumer preferences. Some consumers are shifting their buying behavior toward healthier options, characterized by lower sugar content, better ingredients, and improved nutrition. These trends were reflected in Coke's latest results, which highlighted volume growth in Coca-Cola Zero Sugar, Diet Coke, Fanta, Fairlife, BodyArmor, and Powerade. For years now, Coke has been seeing excellent growth in zero sugar and diet versions of its flagship Coca-Cola products -- a sign that investment in these labels is paying off.

2. Adapting to the times

The Trump administration's Make America Healthy Again Commission is pressuring food and beverage companies to phase out petroleum-based synthetic dyes and replace artificial ingredients with natural ingredients. On its latest earnings call, Coke said that it plans to expand its Trademark Coca-Cola product range to include U.S. cane sugar this fall.

In the U.S., Coke uses high-fructose corn syrup as its primary sweetener because it is cost-effective. But Coke made in Mexico typically uses cane sugar, which is why some consumers tend to go out of their way to buy this product version. The decision to make Coke with cane sugar in the U.S. may have garnered a negative reaction if announced years ago, but the time is right to make this change.

Coke's standout brands in recent years have generally been the healthier options in its portfolio. It has had resounding success growing Topo Chico since it acquired the brand in 2017. Similarly, its dairy brand Fairlife (acquired in 2020) has been a value add for the company. Not only are these brands doing well, but they also diversify Coke away from a majority soda lineup toward other options, which makes the company better positioned to unlock earnings growth from a diversified revenue stream.

3. A growing and affordable dividend

Money isn't created out of thin air. For a company to consistently grow its dividend and thus incur a larger dividend expense, it must grow its earnings.

Coke's earnings growth hasn't been great in recent years, but that's mostly because it has been making significant changes to its brand lineup and addressing the aforementioned challenges. However, the growth has been sufficient for Coke to continue increasing its dividend.

Coca-Cola pays a $0.51 per share quarterly dividend, or $2.04 per year. If Coke hits its adjusted EPS guidance of 3%, earnings will be $2.97 in 2025 -- meaning that Coke can afford to grow its dividend without impacting its financial health or taking away cash that could otherwise be reinvested in the business.

Coke also has a reasonable valuation. Based on the share price of $69.17 at the time of this writing and $2.97 in 2025 earnings, Coke would have a price-to-earnings ratio of 23.3. It's not a bargain-bin price for a low-growth dividend stock. And there are plenty of better deals available for investors seeking a superior value. However, Coke arguably deserves this valuation because the dividend is so reliable, and the company continues to generate organic growth and pricing power at a time when many of its peers are struggling.

A potential centerpiece of a passive income portfolio

Coke's brand lineup, high-margin business, and willingness to adapt to changes in consumer preferences make the company a worthy foundational holding for income investors.

The shift from corn syrup to cane sugar in the U.S. may lead to higher costs in the near term, but the move could pay off if it increases sales volumes.

Coke continues to demonstrate why it is the industry leader across numerous non-alcoholic beverage categories, and why the stock remains a plug-and-play option for income investors to add to their portfolios.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.