2 Dividend Kings to Buy Now and 1 to Avoid Despite the Yield

Dividend Kings, or blue chip companies that have raised their dividends annually for at least 50 consecutive years, are usually stable long-term investments. Even as the U.S. experienced six official recessions over the past five decades, these companies consistently grew their earnings and generated enough cash to cover their dividends.

Three of those Dividend Kings are Coca-Cola (NYSE: KO), PepsiCo (NASDAQ: PEP), and Altria (NYSE: MO), which have raised their dividends annually for 64, 54, and 57 consecutive years, respectively. While all three of these stocks might seem like safe places to park your cash in this tumultuous market, I'd only buy two of them while avoiding the other.

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Buy Coca-Cola and Altria

Coca-Cola, the world's largest beverage company, and Altria, the largest tobacco company in the U.S., might initially seem like shaky investments. Consumers are drinking less soda worldwide, and U.S. smoking rates have dropped to historic lows over the past six decades.

However, Coca-Cola doesn't simply sell soda. It also sells fruit juices, teas, sports drinks, energy drinks, bottled water, dairy products, coffee, and even alcoholic beverages. It also constantly refreshes its flagship sodas with new flavors, healthier versions, and smaller serving sizes. Instead of bottling its own drinks, Coca-Cola mainly sells its concentrates and syrups to independent bottlers that produce and distribute the finished products. That asset-light business model enables it to maintain high margins and generate ample cash to fund its dividends.

Altria has also been diversifying its business away from cigarettes, which include the top-selling Marlboro brand, by selling more smoke-free products. It expects those products -- which include e-cigarettes, nicotine pouches, and snus -- to bring in at least $5 billion in revenue (nearly a quarter of its projected sales) by 2028. It also constantly raises its cigarette prices to offset its declining volumes, and it's cutting costs and buying back more shares to boost its EPS.

From 2025 to 2028, analysts expect Coca-Cola's EPS to grow at a 7% CAGR, and for Altria's EPS to increase at a 13% CAGR. Coca-Cola still looks reasonably valued at 25 times next year's earnings, while Altria looks even cheaper with a forward price-to-earnings ratio of 12.

Coca-Cola pays a forward yield of 2.4%, and its low trailing payout ratio of 62% gives it plenty of room for future hikes. Altria, which has a payout ratio of 89%, pays a forward yield of 6.5%. Both stocks should hold up well against inflation, rate hikes, and other macro headwinds.

But avoid PepsiCo

PepsiCo might seem similar to Coca-Cola, but it operates a completely different business model. It owns a diverse portfolio of beverages, but it bottles and distributes a large portion of its own drinks. It also sells packaged foods through Frito-Lay, Quaker, and other subsidiaries.

That fragmented business model has several glaring weaknesses. By bottling its own drinks rather than simply selling syrups, PepsiCo's beverage business incurs higher capital expenses than Coca-Cola. Meanwhile, its packaged foods business is struggling with stiff competition from healthier and private label brands, the impact of inflation on its margins and pricing power, as well as shifting health trends and the increased usage of GLP-1 weight loss drugs. A series of major recalls (especially at Quaker Foods) exacerbated that pressure.

All of these challenges throttled the growth of PepsiCo's North American business, which accounts for over half of its operating profits, and offset its stronger overseas growth.

From 2025 to 2028, analysts expect PepsiCo's EPS to grow at a 14% CAGR as it resolves those issues, yet its stock trades at just 15 times forward earnings. It pays a high forward dividend yield of 4.6%, which is supported by a stable trailing payout ratio of 75%.

PepsiCo might seem like an attractive dividend play at these levels. Still, its asset-heavy beverage business and heavy dependence on packaged foods make it a much weaker investment than Coca-Cola or Altria in this choppy market.

Leo Sun has positions in Altria Group and Coca-Cola. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.