1 Top Dividend Stock to Buy With $500

1 Top Dividend Stock to Buy With $500

It doesn’t take a huge initial purchase to begin building up a great investment portfolio. Dividend stocks are especially attractive options because you can choose to reinvest your quarterly payouts automatically rather than taking the cash. You’ll accumulate more shares over time that way, amplifying your long-term returns.

The dividend stocks you pick should have excellent expansion opportunities and a good chance at boosting their earnings power over time. And ideally, they’ll be market leaders that pay a generous — and growing — dividend.

Coca-Cola (NYSE: KO) fits this description perfectly. Let’s look at why the beverage giant is worth buying if you’re considering putting some cash to work in a top dividend stock.

Gaining market share

Coke is boosting sales at a healthy rate these days even while peers struggle with growth challenges. Organic sales were up 12% through the 2023 fiscal year on top of big gains a year earlier. Contrast those results with PepsiCo (NASDAQ: PEP), which expanded its beverage business by 7% in the same period, and there’s a clear winner to favor right now.

Coke gets a lift from its industry leadership position, its focused portfolio centered around on-the-go beverages, and its market-trouncing efficiency. There’s plenty of growth available outside of traditional sparkling sodas, too. Coke is winning in areas like energy drinks, teas, waters, and alcoholic drinks. It already accounts for a significant portion of all beverages consumed around the world, but there’s room for that metric to improve in the years and decades to come.

Cash and profits

The dividend is easily covered by Coke’s rock-solid finances. Start with free cash flow, which improved to $9.7 billion this past year from $9.5 billion in 2022. Management is projecting a slightly heavier spending year in 2024 so that cash flow slips to around $9.2 billion. That’s still well above the $8 billion it paid in dividends in the past 12 months.

Earnings trends are just as strong. Coke benefited from rising prices and higher sales volumes in 2023, allowing profit margin to edge up to 29.1% of sales from 28.7% of sales in 2022. That’s about double PepsiCo’s profitability and it means dividend investors have every reason to feel confident that their payout can keep rising over the coming years — just as it has for roughly the last 60 years.

The price is right

It’s true that you’ll have to pay a premium to own this top dividend stock. Coke shares are priced at 5.8 times sales, more than double PepsiCo’s valuation. Yet that price-to-sales (P/S) ratio has been as high as 7 at several times in the past five years. Coke has become cheaper as Wall Street shifted its preference toward high-growth stocks in areas like tech.

Dividend investors should consider taking advantage of that short-term change in sentiment to pick up this stellar business. Sure, Coke is expecting sales growth to slow to between 6% and 7% this year, and its earnings will likely just expand by about 5%.

Yet, steady gains in both these metrics are what shareholders have come to expect from the sparkling beverage leader. Some years bring unusually strong growth, while others are more modest. But through it all, Coke tends to have no problem capitalizing on its massive competitive advantages. That’s a big reason why you’ll likely be happy to have this dividend stock in your portfolio over the long term.

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Demitri Kalogeropoulos 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.