Key Points
Beverage powerhouse Coca-Cola is a reliable dividend payer, but doesn’t offer a great yield.
This stock, however, offers something that might matter to certain income-minded investors.
You may want to establish a position in a dividend name well before you actually need its income, recognizing its payments will grow over time.
Need income? Dividend stocks are arguably the best choice for most investors. Unlike bonds, most companies' dividend payments grow over time. Dividend stocks also offer some opportunity for capital appreciation, even if their starting dividend yields aren't always quite as high as those you'd normally see from fixed income instruments.
With that as the backdrop, how much stock would you need to hold in, say, iconic dividend payer Coca-Cola (NYSE: KO), to produce $12,000 in annual dividend income? Here's the math.
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Crunching the numbers
It's not necessarily the highest-yielding dividend stock to consider adding to your portfolio. Although its forward-looking yield of 2.5% is certainly respectable, it's also just average.
Coca-Cola shines as an income investment in a couple of other ways.
One of those ways is reliable dividend growth. The Coca-Cola Company has not only paid a quarterly dividend like clockwork for decades, but has also raised its per-share payment in each of the past 64 years. And given the nature of its products (consumer staples that people buy over and over again) and the powerful brand names that make up its product portfolio, there's no end to this streak in sight.
The other bullish argument for owning a stake in Coca-Cola as an income investment is the pace at which it's grown its dividend payment. The current quarterly per-share payment of $0.53 is more than 50% higher than the $0.35 per share from just 10 years ago. That's inflation-beating annualized growth of about 4.2%.
In answer to the question, though, it would take 5,660 shares of KO to generate $12,000 in annual dividend income at today's per-share payment rate. That's roughly $472,585 worth of this stock, at today's prices.
Plan ahead
That's not exactly chump change, particularly if you aren't yet in a position. You can certainly step into tickers with much higher starting yields.
And this underscores an important reality about dividend stocks in general. That is, they're not all built the same. Some offer above-average yields, but have less potential for price appreciation. Think of wireless service provider Verizon, which serves a consistent but well-saturated market, delivering strong, rising dividends but not much actual capital growth.
Coca-Cola is at the other end of this spectrum. Its dividend profile is OK, but the stock's gained an impressive 83% over the course of just the past 10 years. Anybody with $472,585 worth of KO shares collecting $12,000 in yearly dividend income from them right now would have paid only a little less than $260,000 for this stake 10 years ago. The effective yield on their initial investment is now about 4.6%, and price growth would have accounted for a little more than half of their total net returns.
The point is, sometimes you need to establish a dividend holding well before you actually need the dividends it's going to pay. Other times, you don't.
Either way, Coca-Cola is an undeniably solid dividend stock even if its current yield isn't exactly thrilling.
James Brumley has positions in Coca-Cola. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.