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How to Wage War Against Inflation – And Win!

All investors love a stable dividend stock. Especially if they rely on the income to survive.

But if that’s our only focus as dividend investors, we’re doomed. We’ll win the battle, but lose the war.

Against whom is this war being waged, you ask? Inflation!

Like death and taxes, it’s insidious and ever present. Year after year, it can eat away at the purchasing power of the income we generate from dividend stocks.

Now you know why we’re always banging the dividend growth drum so hard. Without consistent dividend increases every year, there’s no way we can offset the effects of inflation on our portfolios.

I’ll concede, finding reliable dividend growth stocks can be a daunting task. After all, a paltry 10% of the companies in the S&P 500 Index typically qualify as Dividend Aristocrats. (These are companies that have both paid and increased their dividends every year for at least 25 years.)

Not to worry, though.

We’re on the frontlines for you, endlessly on the hunt to identify the best dividend growth opportunities. With that in mind, here’s our latest find that’s worthy of your consideration…

Time to Join the Pepsi Generation

As most people know, PepsiCo (PEP) is North America’s largest food and beverage company. Internationally, it’s second only to Nestlé (NSRGY).

PepsiCo markets more than 200 different brands of products, including American favorites such as Frito-Lay, Pepsi-Cola, Gatorade, Tropicana Orange Juice and Quaker Foods.

Demand for such staples remains stout through all economic conditions. Nevertheless, PepsiCo continues to aggressively support its core businesses in North America with increased marketing and product innovations. In 2012, advertising expenses accounted for 5.7% of total revenue. In 2013, however, PepsiCo expects the ad budget to exceed total revenue growth.

In addition to its domestic markets, PepsiCo is also ramping up its presence internationally.

PepsiCo generates about 47% of its revenue from overseas markets – and has recently announced a capital expansion in India to the tune of $5.5 billion. Expect to see further marketing efforts directed at increasing market share in Russia, China and Brazil, as well.

A quick analysis of PepsiCo’s financials reveals a well-run company, poised for even more growth…

Case in point: PepsiCo reported third-quarter earnings of $1.24 per share, beating analysts’ expectations of $1.17 per share.

And despite currency headwinds, the company continues to increase both margins and market share in a fiercely competitive environment.

All in all, the company boasts an enviable business, which leads us to the most important question of all…

What about the income?

Sweet Drink, Sweeter Dividend?

PepsiCo currently pays a quarterly dividend of $0.57, equal to a 2.7% yield. That’s right on par with 10-year U.S. Treasuries – and well above the S&P 500 average dividend yield of 2.3%.

Better yet, we don’t have to pay a premium price to earn this yield. The stock currently trades at about a 5% discount to the industry on a price-to-earnings ratio basis.

Best of all, PepsiCo is an entrenched member of the Dividend Aristocracy – increasing its dividend every year for 40 consecutive years.

With a dividend payout ratio (DPR) of just 51.9% over the last 12 months, PepsiCo can easily afford to keep that streak alive, too.

Speaking of which, PepsiCo typically announces its dividend increases in the first half of the year. So we’re getting ever closer to the next announcement.

While past performance is no guarantee of future results, the odds are definitely in favor of another hike. And a meaningful one, too.

For the past five years, PepsiCo has increased its dividend by an average of 8.4% per year, which will certainly keep you ahead of inflation.

Bottom line: It’s important to get paid, but even more important to get a raise every year, too, which makes PepsiCo just the kind of ammunition we need to win the war against inflation.

Safe (and high-yield) investing,

Louis Basenese