In the world of income investing, two standout names garner significant attention: Coca-Cola (KO) and Starbucks (SBUX). Both companies currently offer an attractive dividend yield of approximately 2.9%. However, when analyzing their fundamentals, growth potential, and operational strengths, Coca-Cola emerges as the superior option for income-focused investors.
Historical Context & Dividend Growth
Coca-Cola has established itself as a titan in the beverage space, boasting an impressive track record of raising its dividend for an astonishing 63 consecutive years. Since going public in 1919, Coca-Cola has become synonymous with sustained profitability, raising dividends 505% since 2000. This history of consistent dividend growth not only reflects the company’s strong business model but also makes it a cornerstone holding for many income investors.
Conversely, Starbucks began its dividend journey far more recently, in 2010. In this relatively short time, it has gained a reputation for significant dividend increases, with payouts rising by an impressive 720% over the last decade. While this growth is commendable, it is essential for investors to evaluate current sustainability, not just past performance.
Current Yield and Recent History
At present, Coca-Cola and Starbucks each offer a dividend yield of 2.9%, having both paid a dividend of $0.41 per share back in 2020. Since then, Starbucks has increased payouts 49% to $0.61 per share, while Coca-Cola has raised its dividend by 27% to $0.52 per share. Notably, Coca-Cola’s growth has barely kept pace with inflation over this period, which has risen approximately 25%. This highlights that while both companies are increasing dividends, trends indicate diverging paths forward.
Assessing Dividend Sustainability
Three significant indicators strongly favor Coca-Cola as the better income investment going forward:
Payout Ratio: The payout ratio measures the percentage of net income allocated to dividends. A lower ratio indicates potential for future growth in dividends. Starbucks currently has a concerning payout ratio of 103.9%, suggesting it is relying on its cash reserves or accruing debt to maintain dividend payments. In stark contrast, Coca-Cola’s payout ratio stands at a more sustainable 67.7%. This difference signals a healthier capacity for dividend growth.
Earnings Growth: Earnings are the backbone of any sustainable dividend payment. In its latest quarter, Coca-Cola reported a remarkable year-over-year earnings growth of 29.8%. Meanwhile, Starbucks experienced a challenging decrease in earnings, falling 47.1% as it is currently undergoing a significant transformation. Such contrasts signal Coca-Cola’s stronger underlying business performance, which inherently supports its dividend policy.
- Operating Margin: A company’s operating margin reflects its efficiency and ability to convert revenue into profit. Coca-Cola excels in this regard, showcasing an operating margin of 32.2%. This not only surpasses Starbucks’ much lower margin of 9.51% but also exceeds the average S&P 500 company operating margin of 10.8%. Higher margins provide Coca-Cola with more flexibility to continue increasing dividends moving forward.
Share Buyback Impact
Another crucial factor contributing to Coca-Cola’s dividend sustainability is its active share buyback program. The company purchased 1.1 million shares, returning $81.2 million in the last quarter alone. This effort is part of a broader initiative to buy back $6 billion worth of shares by 2030, which can enhance earnings per share (EPS) and provide support for dividend increases.
Starbucks, on the other hand, has paused share buybacks since May 2024, as it channels resources towards its turnaround efforts. While prudent management can prioritize operational efficiency, Coca-Cola’s capacity for buybacks enhances its shareholder value and dividend reliability.
Market Cap & Volatility
Coca-Cola boasts a substantial market cap of $300 billion, making it a relatively stable investment choice. Companies of its size tend to be more insulated from market volatility, providing a more reliable income stream.
Starbucks, with its growth-focused strategy, has generated impressive capital appreciation over the years, with shares appreciating over 1,000%. However, the accompanying volatility can pose risks for income investors who prioritize stability and consistent returns.
Conclusion
When evaluating Coca-Cola and Starbucks through the lens of income investing, Coca-Cola clearly emerges as the superior choice. Despite both companies offering similarly attractive dividend yields, Coca-Cola’s history of dividend increases, sustainable payout ratio, strong earnings growth, and robust operating margin indicate a favorable path forward for income investors.
Starbucks has shown significant potential, but the recent downturn in earnings and reliance on cash reserves raise concerns about its long-term dividend sustainability. Thus, for income investors looking for consistent returns and a reliable dividend payment, Coca-Cola stands as the "knock-out" choice. Its solid fundamentals, coupled with a commitment to shareholder value through buybacks, position it as the better buy for income-oriented portfolios moving into 2026 and beyond.
