Coca-Cola (KO) is another dividend stock with a powerful brand and an enormous reach. Couple that with the 2.9% dividend yield and a massive portion of shares held by Warren Buffett’s Berkshire Hathaway (BRK.B), and it seems natural to call Coke “low-risk.”
However, Coke stock is not all it’s cracked up to be. The stock is up just 6% YTD vs. 16% for the S&P 500, and up just 31% in the last three years vs. a 50% rally for the broader market.
And while Coca-Cola dividends are highly reliable, the company hasn’t really been exceedingly generous with its dividend growth as of late. From 2012 to 2013, Coke dividends increased 9% — nothing to sneeze at, yes, but hardly anything to get amazed over. But with a payout ratio that’s roughly half of earnings, you have to wonder why Coca-Cola is being so miserly.
Maybe it’s because they don’t like their long-term prospects. After all, recent earnings weakness indicates continued pressure on soft-drink sales as Americans drink less sugary sodas, and global growth is increasingly hard to come by for Coke considering its already massive market saturation.
Coke is down more than 11% from its all-time high set in May for a reason. I’m not saying KO is going out of business, but be careful about banking on Coca-Cola as a rock-solid play that won’t lose ground.