There are healthy debates on dividend yield versus dividend growth. Investors seeking income will automatically gravitate toward dividend yield by default. While that intuition is good, we should pay attention to other aspects such as growth rate of the payment. In our quick study, we attempt to compare companies with similar business model and strong dividend history. There is not better comparison in our mind that Coke (KO) and Pepsi (PEP). We extracted 5 years data (2016-2021) dividend and price data for both companies from Yahoo Finance. The conclusion speaks for itself, we should pay more attention to dividend growth as a key indicator for capital appreciation.
Coke has higher dividend yield that Pepsi in 2016 and 2021. If an investor was to choose an income producing asset in 2016, they would gravitate toward Coke with 3.22% yield while Pepsi yield of 2.86%.
Now we look dividend payment growth rate. Pepsi raised their payment by 43% while Coke increased their payment by 20%.
Finally we review what happened to the stock price. We took the average price of both stocks for 2016 and 2021. The performance is clear that Pepsi outperformed Coke by a wide margin. This finding is consistent with the teaching of Geraldine Weiss in Dividends Don’t Lie that dividend is a proxy for profit growth.