When a company earns a profit, it can pay a portion to shareholders as dividends. That's a nice reward for shareholders, providing regular income. However, it's still important to pick strong companies that cannot only maintain dividends but increase them regularly through higher earnings and cash flow.
These three stocks fit the bill. Two of them are Dividend Kings, an illustrious group of companies that have raised dividends for at least 50 straight years.
You don't have to start with a huge sum of money to reap the rewards, either. Investors starting with $5,000 can own shares in these three dividend-paying stocks.
1. Coca-Cola
In existence since the late 1800s, Coca-Cola (NYSE: KO) sells beverages around the world under popular brands such as its namesake, Sprite, and Fanta. While people may think of it as a soda company, its products also include items such as water, juice, and other beverages.
While the business may no longer be growing quickly, Coca-Cola has been increasing sales and gaining market share. It continues to increase profitability, including a 17% gain in the second quarter after items such as foreign currency conversion effects have been removed.
This has translated into plenty of free cash flow (FCF). In the first six months of the year, Coca-Cola's FCF was $3.3 billion. That easily covered the $2.2 billion in dividends.
The board of directors has increased payouts for 62 straight years, including a hike of over 5% earlier this year to an annual $1.94. Coca-Cola's shares have a 2.7% dividend yield, more than double the S&P 500's 1.3%.
2. Merck
Merck (NYSE: MRK) produces drugs, including the popular Keytruda, which is used to treat various cancers. Last year, the drug generated $25 billion in revenue, up 19.5% from the previous year.
Merck's second-quarter sales, excluding foreign currency exchange conversions, increased 11%. Fortunately, the business's results don't fluctuate with the economic cycle since people need Merck's important treatments. It's not an exaggeration to say that it's a matter of life and death in some cases.
Keytruda remains an important growth driver, and its sales accounted for 45% of the second-quarter top line. But Merck has other drugs, including the popular Gardasil vaccine. It also has other treatments in the pipeline and received approval for Winrevair, which is used to treat pulmonary arterial hypertension, earlier this year.
Merck produces plenty of FCF to support dividends. In the first half of the year, it had FCF of $7.1 billion in FCF, and it paid out $3.9 billion in dividends.
The company has increased dividends for a number of years. This year, Merck's quarterly payout was $0.77, 5.5% above last year. The stock has a 2.6% dividend yield.
3. PepsiCo
PepsiCo (NASDAQ: PEP) sells beverages, snacks, and other food items. This includes soda, chips, cereal, and granola bars under well-established brands, including Pepsi, Mountain Dew, Aquafina, Doritos, and Quaker.
The company's adjusted earnings per share grew 10% in the second quarter despite sluggish 2% sales growth. However, the muted top-line growth appears to be temporary based on broad economic factors. Consumers have been stretched by higher prices, as other companies such as McDonald's have reported. With PepsiCo's powerful brands that command store shelf space, selling volume will undoubtedly pick up.
In the meantime, shareholders can enjoy the 3.1% dividend yield. And management and the board of directors had enough confidence in future prospects to announce a 7% dividend increase in April. It has paid dividends since 1965 and raised them annually for 52 consecutive years.
PepsiCo can easily afford the payments. Its shares have a 73% payout ratio.
Should you invest $1,000 in Coca-Cola right now?
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool has a disclosure policy.
The Smartest Dividend Stocks to Buy With $5,000 Right Now was originally published by The Motley Fool