Coca-Cola and Procter & Gamble allow investors to participate in the stock market while collecting highly reliable passive income.
Coca-Cola (KO 0.94%) checks all the boxes of a rock-solid dividend stock. It is an industry-leading, well-known business with diversification across beverage categories and geographic markets. It is a member of the Dow Jones Industrial Average, whose 30 components act as representatives of the broader market. It is also a Dividend King with 62 consecutive years of divined increases. And it has a compelling yield at 3.1%.
Procter & Gamble (PG 0.35%), commonly known as P&G, operates in completely different industries than co*ke -- including fabric, home care, baby, feminine, healthcare, and beauty. But as an investment, P&G is very similar to co*ke in that it distributes a boatload of money to investors through dividend payments.
Here's why P&G is a safe dividend stock that's worth a closer look.
Image source: Getty Images.
P&G's multifaceted capital return program
P&G and co*ke are two massive companies with sizable dividends. Their payouts are so large that P&G has paid over $9 billion to shareholders in the last 12 months while co*ke has paid just shy of $8 billion -- earning both companies a spot on the list of the 10 largest companies by dividend expense.
MSFT Total Dividends Paid (TTM) data by YCharts
The key difference between P&G and other companies that focus solely on a dividend is that it also buys back a ton of its own stock. P&G has reduced its share count by 12.9% over the last decade compared to just 1.8% for co*ke. Reducing the share count increases earnings per share -- making the company a better value. P&G's consistent dividend, paired with its buyback program, more than makes up for its slightly lower yield of 2.5%.
Overcoming glaring challenges
The biggest issue with P&G in recent years is sales volume. The company has done a masterful job of improving operations and leveraging price increases. But brand consolidations and lower volume have resulted in very little sales growth -- just 12% over the last decade.
PG Revenue (TTM) data by YCharts
Still, P&G is undeniably a far better business today. As you can see in the chart, P&G's operating income has grown at a far higher rate than sales, indicating that it is expanding margins. When operating income grows faster than sales, it means a company is becoming more efficient and squeezing more profit out of each dollar it brings in from revenue. P&G's higher margins are a testament to its focus on quality over quantity. It has doubled down on its best brands rather than overexpand and become wasteful.
I'll admit, I had doubts about P&G, especially as inflation was ramping up a couple of years ago. But the company's results speak for themselves -- indicating P&G has impeccable pricing power. P&G's biggest advantage is attracting and retaining customers at different price points. For example, it owns Tide, Downy, Gain, and Bounce -- which have varying product offerings and price points. If customers pull back on spending, they may switch from Tide to Gain, but that doesn't mean P&G will lose the customer altogether.
By comparison, if a consumer chooses to shop at Walmart instead of Target, Target loses out completely. P&G's brands work together and protect the company from industry challenges even during economic downturns. This diversification and consistency makes P&G such a reliable dividend stock, no matter what the economy is doing.
The P&G premium
Aside from its stagnating sales growth, the biggest red flag for buying P&G stock now is its valuation.
PG PE Ratio data by YCharts
P&G's price-to-earnings ratio is 26.6 -- which is high for a stodgy consumer staples company. But as mentioned, P&G is no ordinary dividend stock. It is a Dow component with 68 consecutive years of dividend increases.
The problem is that investors must pay a premium price for P&G's quality. But at least its historical valuation indicates this has been the case for a while now, as P&G's 10-year median P/E is 25.3. There are plenty of less expensive options than P&G, including co*ke. Still, the fact that P&G has long sported a premium valuation should help investors understand that the stock isn't necessarily overpriced.
The perfect safe dividend stock
P&G's sales volume stagnated in its recent quarter (third-quarter fiscal year 2024). The company's guidance suggests 2% to 4% revenue growth for the full fiscal year, over $9 billion in dividends, and $5 billion to $6 billion in buybacks.
Investors should expect P&G to return to mid-single-digit sales growth in fiscal 2025 while retaining its high margins. Still, the company continues to deliver for shareholders in its capital return program.
P&G is the perfect dividend stock for risk-averse investors who aren't trying to outperform the S&P 500, but want to preserve capital and collect a steady stream of passive income from a company that can put up solid results even during a recession.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Chevron, Home Depot, JPMorgan Chase, Microsoft, Target, and Walmart. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
