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Investors looking for income vehicles often seek stocks with long track records of payout hikes. Although companies have the freedom to adjust dividend payments at will, abandoning a decades-long streak of periodic dividend hikes can undermine confidence in a stock, so the payout increases tend to continue.
This is especially true of Dividend Kings, or companies that have a streak of annual payout hikes of 50 years or longer. Knowing that, two stocks are in a particularly strong position to continue increasing their payouts, while one stock may leave investors questioning whether the dividend increases can continue without undermining the company's growth.
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PepsiCo (NASDAQ: PEP) has increased its dividend for 54 straight years. In May, the latest increase hiked its annual dividend to $5.92 per share. A combination of those payout hikes and stock price declines has taken its dividend yield to 4.1%, almost quadruple the S&P 500 average of 1.1%.
However, the most compelling reason to buy PepsiCo is arguably the company's transformation. PepsiCo encompasses numerous beverage and food brands in addition to its flagship cola, but over the last few years, sales have stagnated as consumers sought healthier alternatives.
PepsiCo responded by acquiring new brands and changing the ingredients in some of its products, and that approach seems to have worked. In the third quarter of fiscal 2026 (ended Sept. 5), revenue of $25 billion climbed by 6% from the same prior-year period. Also, its over $3 billion in net income surpassed the year-ago level of $2.6 billion and exceeded the $2 billion quarterly cost of its payout.
Investors have only recently begun to see a turnaround, but it is likely not too late to buy considering its 18 P/E ratio. Given that low valuation, now might be a great time to buy before more investors discover PepsiCo's attractive value proposition.
McDonald's (NYSE: MCD) is the market's newest Dividend King. In September, it approved its 50th consecutive annual payout hike, taking the yearly dividend to $7.72 per share. With that increase, investors now earn a 2.7% dividend yield.
McDonald's has succeeded with its unique approach to franchising, which makes its stock more recession-resistant. Franchises are approximately 95% of all McDonald's restaurants and provide steady cash flows that are only minimally affected by economic cycles.
In addition to start-up fees, the company owns the real estate for franchise stores, making rent a significant source of revenue. Additionally, franchises pay between 4% and 5% of their annual gross sales to the company, along with various other fees.
Such payments helped Q3 revenue grow to $7.2 billion, a 1% increase from year-ago levels. Falling expenses meant the $2.5 billion in net income increased by 9%. Additionally, its profits were well above the $1.3 billion in quarterly dividend costs, making it more likely to maintain its Dividend King status over time.
Investors will also like that its current 22 P/E ratio is well below its five-year average of 26, suggesting it sells at a discount. Given the low earnings multiple and the stability of its business, owning this stock should continue to deliver profits for investors.
Even among Dividend Kings, Universal Corporation (NYSE: UVV) gets relatively little attention despite its dividend yield. Its payout has risen for 56 straight years, and at $3.32 per share annually, it yields an astounding 8.4%! Unfortunately, such yields often signal a stock's struggles rather than an excellent buying opportunity, and indeed, that appears to be the case with Universal.
The problem appears to stem from the company's main revenue source. Although it operates a business providing fruit- and vegetable-based ingredients, its main business is growing tobacco. The tobacco industry successfully mitigated the falling popularity of its main product for decades, but Universal's financials may leave investors wondering whether the company can continue to generate the growth it needs to sustain its Dividend King status.
In the second quarter of fiscal 2027 (ended Sept. 30), its revenue of $622 million fell 18% from year-ago levels. Universal earned $13 million in fiscal Q2, but that was well below the $34 million profit in the year-ago quarter. That is also less than the approximate $20 million the company spends on its dividend each quarter.
Additionally, the declining revenue is not a one-time event, as analysts forecast lower revenue for at least the next two quarters. Hence, unless Universal's management can find a way to turn the company around, it may have no choice but to eventually abandon its Dividend King status.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2028 $320 calls on McDonald's and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.
2 Dividend Kings Worth Buying and 1 Whose Streak Has Become a Liability was originally published by The Motley Fool
