PepsiCo Loses to 30-year U.S. Treasury Bonds on Yield. Here's Why It Wins on Everything Else.

In an environment of rising interest rates, dividend payers have had more trouble competing for income investors' attention. The 30-year Treasury bond now offers a yield of around 5.25%, a level matched by few dividend stocks.

That includes PepsiCo (NASDAQ: PEP), whose dividend yield is around 4.1%. Fortunately, the stock offers other benefits that could make buying PepsiCo for its dividend a more attractive option than a 30-year Treasury over the long term. Here's how.

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PepsiCo as a "better" alternative

Admittedly, describing a stock as a better alternative to a 30-year Treasury may seem heretical. Investors consider U.S. Treasuries the benchmark of safety with guaranteed returns. In contrast, companies can adjust dividend levels at any time for any reason. Hence, recommending an individual stock with a lower cash return may seem counterintuitive.

Still, a 30-year Treasury bond can lose value if interest rates rise, forcing investors to sell it at a discount to raise the effective interest rate. PepsiCo stock could fall in theory. However, its shares are backed by numerous beverage and food brands besides Pepsi. Those include Mountain Dew, Gatorade, Doritos, and Quaker Oats, established brands that have existed for decades and could bolster the company's growth.

Moreover, PepsiCo stock should continue to rise on a long-term basis. Over the last 30 years, PepsiCo stock surged by almost 390%, and that return rises to more than 920% when including dividends.

PEP data by YCharts

The dividend is also an advantage, even to investors interested only in income. In May, the company increased the annual payout to $5.92 per share. Although that yields just 4.1% as previously mentioned, investors should note that it has also increased that payout for 54 straight years, making PepsiCo a Dividend King.

Several funds will invest in PepsiCo explicitly because of the Dividend King status, but more importantly, that track record ties the stock's reputation to annual payout hikes. Since ending that streak would likely undermine confidence in PepsiCo stock, the company is likely to continue raising the dividend if possible.

Fortunately, it can probably afford the payout. Over the trailing 12 months, PepsiCo generated $9.7 billion in free cash flow. That is significantly more than the $7.8 billion it paid in dividends, meaning it can likely afford the payout and modest annual increases. Thus, when also accounting for the aforementioned potential for stock gains, it could pay to take a chance on PepsiCo stock.

PepsiCo and the 30-year Treasury

Given the likelihood of long-term gains, owning PepsiCo could deliver higher returns than owning a 30-year Treasury, even after accounting for the lower cash return and higher risks.

Indeed, 30-year Treasuries offer a guaranteed return, and a direct default is highly unlikely. Nonetheless, PepsiCo has built a high level of confidence, backed by numerous well-known and popular consumer brands, which has driven a rising stock price.

Additionally, the Dividend King status and the annual payout hikes that come with it bolster confidence in the payout. With that and the potential for stock gains, PepsiCo stock is likely the more suitable choice for most investors.

Will Healy 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.