Dividend stocks are often an overlooked investment by many Main Street Americans. It isn’t hard to see why. A 3 percent yield on a $5,000 investment isn’t all that impressive, a mere $150 per year, or so. When you are thinking about turning a lifetime of 401k contributions into a retirement plan, that isn’t really the kind of number that gets your mind racing about possibilities.
However, the more investable assets you actually have, the more dividend stocks start to look interesting. Consider that many dividend stocks are fairly safe from anything but the most catastrophic downturns. Stocks like McDonalds, and Coca Cola, for example. Those stocks can, and will, trade up and down, but if you don’t really plan on selling them anytime soon, they are sort of like corporate bonds where if you hold them until retirement (or just several years) chances are you will at least get all of your original investment back.
What makes dividend stocks like Coca Cola so interesting in a growing portfolio is that they offer potential growth, plus the ability to outpace inflation, all while kicking off real income.
Asset Allocation and Dividend Stocks
As always, you shouldn’t be thinking about investing in individual stocks until your retirement accounts are fully funded based on your plan and investment allocation. In other words, if you aren’t dumping 10% to 15% into your 401k, stop fooling around with individual stocks and load up your long-term investments.
From an asset allocation standpoint, dividend stocks are often represented within the mutual fund and ETF world as “value stocks” even though that isn’t exactly accurate. (You can be a value stock without paying a dividend, for example.) There are some dividend focused mutual funds and ETFs out there of course. These are the best way to fill up any long-term, asset allocation needs.
Coca Cola Dividend
To invest in a dividend stock for its dividend, you need to do your research and feel comfortable in the long-term prospects of the company to at least stay even. That is, for a company like Coca Cola, you don’t need growth, but you don’t want to feel like there is a long-term decline coming in the company’s fortunes either. Short-term fluctuations, and even those over a few years, are immaterial if you are investing for the dividend, but the minimum goal is to at least get back your original investment. Of course, the better goal is to get some capital appreciation in addition to your dividends.
Checking a free Morningstar report can give you a quick idea of how Wall Street stock analysts feel about Coke stock.
Now, to Coca Cola stock. Coca-Cola raised its quarterly dividend to 42 cents per share from 41 cents per share. The isn’t a lot, but the dividend was already pretty good, so this is extra icing. At the recent closing price of around $56 that works out to about 2.95% percent annual yield.
My mouth starts to water at the idea of a good, strong company AND a nearly 3 percent dividend.
Now, Coca-Cola is no super-growth company. It’s stock chart basically moves sideways with a lot of bumps. But, it’s five year chart shows some growth. Plus, it’s Coke, do you really think it’s going anywhere for the next decade?
Frankly, the main risk to Coke these days is biting off too much in acquisitions. It makes sense to diversify from soda, but it doesn’t have to own every drink company out there. You aren’t Disney.
We talked about Apple’s stock drifting down into 2% dividend territory. There is probably a lot more upside potential there over the next 5 to 7 years, but Coke has a 3% dividend. Maybe a mix?
It’s a fun time to be investing for the long-term in the stock market. While everyone else wrings their hands over volatility, Coke and Apple shareholders can bide their time and collect their dividends.
About the Author
This is not an investment recommendation, nor an offer to buy or sell securities. This article if for general information only and is not financial or investing advice. Consult your financial and tax professionals for advice specific to your individual situation.
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. At the time of publication, Mr. Nelson owned shares of McDonalds, Coke, Apple, and Disney stock, however, that may change at any time without notice.
ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.