With a better than 50-year history of paying dividends, Coca-Cola (NYSE: KO) is seen as an icon of stable, strong, secure payouts. Yet as consumers move away from soda consumption toward healthier beverages, there will be challenges ahead for its business, which is why it is branching out into new areas, such as its $5.1 billion acquisition of coffee company Costa.
Although Coke and its dividend are not in trouble, there are better investments to be found. Three stocks that these Motley Fool contributors particularly like are Dominion Energy (NYSE: D), AbbVie (NYSE: ABBV), and MGM Growth Properties (NYSE: MGP).
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Higher yield, faster dividend growth
Neha Chamaria (Dominion Energy): As a Dividend Aristocrat, Coca-Cola undeniably has one of the strongest dividend track records in the industry. I don't doubt Coke's dividend sustainability, but I'm unsure whether the company can dole out meaningful dividend increases given the challenging business conditions that include health concerns associated with its sugary drinks. As an income investor, you might therefore want to consider another dividend stock that offers a bigger yield and better dividend growth visibility. One such top stock I recommend is Dominion Energy.
To be sure, Dominion's 15-year run of annual dividend increases pales in comparison to Coke's streak, but this utility stock comes out a winner on other important dividend aspects. To start, Dominion Energy offers a good 4.65% dividend yield versus Coke's 3.5%, and that yield looks pretty sustainable thanks to the company's dividend growth potential.
You see, Dominion Energy is one of the largest electricity and gas utilities in the U.S., serving nearly 6 million customers across 19 states. The company aims to grow its earnings per share at a compound annual rate of 6% to 8% between 2017 and 2020, and 5% or more thereafter, backed by multibillion-dollar capital investments in power generation, power delivery, and gas infrastructure. Some of its major projects include solar expansion in Virginia and grid modernization.
Management believes its earnings growth should be able to support annual dividend increases of 6% to 10% through 2020. Combine that dividend growth with a 4%-plus yield, and you could even end up with double-digit total annual returns from Dominion Energy shares. It's difficult to have such a conviction for Coke right now.
A bargain dividend play
George Budwell (AbbVie): Coca-Cola has undoubtedly been an outstanding cash cow for income investors over the years. But AbbVie -- the maker of the world's best-selling drug in Humira -- is arguably an even more attractive income play right now.
AbbVie comes across as a downright better buy than Coke for two reasons. First, AbbVie's dividend yield of 4.23% is slightly higher than Coke's yield of 3.5%. Second, AbbVie's shares are trading at a dirt-cheap 10 times forward-looking earnings; Coke is presently valued at over 20 times its forward-looking earnings.
Why is AbbVie's stock trading at such a rock-bottom price? The obvious reason is Humira's long-term outlook. This all-star drug is expected to start facing generic competition in earnest in 2023. AbbVie will also need a bit of luck to ensure that its host of new growth products and late-stage clinical candidates are, in fact, able to pick up the slack once Humira's rapid growth starts to reverse course.
That said, AbbVie has laid the groundwork to achieve this goal. Its new endometriosis drug, Orilissa, and blood cancer medication Venclexta, for instance, are both projected to generate billions in sales within the next five years. AbbVie's robust clinical pipeline is also close to bringing several other high-value assets on line in the near future.
All told, AbbVie's downside risk -- stemming from Humira's upcoming loss of exclusivity -- appears to be baked into its valuation at this point. This top dividend stock, therefore, might be worth adding to your income portfolio right now.
Worth a gamble
Rich Duprey (MGM Growth Properties): This casino-focused real estate investment trust (REIT) might be a way for investors to bet on the coming boom arising from the legalization of sports betting.
As with all REITs, casino REITs don't pay income tax like regular companies do: They are required to pay 90% of their income back to shareholders, allowing them to remain exempt from income taxes on the profits paid to investors. Their dividends also tend to have higher yields than most, and that's the case with the payout from MGM Growth Properties, which currently yields 6.3% annually.
MGM Growth remains closely tied to MGM Resorts International (NYSE: MGM), the casino operator from which it was spun off, but which still owns 73% of its business. That makes it different from other casino REITs like Gaming and Leisure Properties, a spinoff from Penn National Gaming; and VICI Properties, which was born from Caesars Entertainment. Those REITs are independent of their former parents.
But MGM Resorts says that over the next three years, it intends to reduce it financial interest in its REIT from the current 73% to 50%.
Legalized sports betting should bolster all casino stocks, even if it's not about to become their primary profit center. And coupled with the geographic diversity MGM's properties enjoy -- from Vegas, where it's the dominant player, to Macau, and in various regional markets -- it helps soften gaming's ups and downs.
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