Thirsty For Income? Consider This Strategy: The Coca-Cola Company (KO)

Page 1 of 2

I read an article extolling the virtues of PepsiCo, Inc. (NYSE:PEP). The author said that he believed that Pepsi would continue to increase its dividend, and they might grow earnings faster than analysts expect. He also made the comment that their cash flow from operations compared to their dividend looked good. I can’t say that I disagree with most of his thesis, but I would suggest investors think outside the box when it comes to generating income. Though there are several beverage companies that should provide a good yield to investors in this environment, there is a less well known company where the income stream might be even better.

The Coca-Cola Company (NYSE:KO)

This Is No DRIP Of A Strategy
If you are a long-term investor, a choice between The Coca-Cola Company (NYSE:KO) or PepsiCo is a common conundrum. On the one hand, Coca-Cola has been the leader in both volume and earnings growth for a while. The company has several of the world’s most well loved brands. PepsiCo on the other hand, has the Pepsi franchise and Frito-Lay. Both companies have long histories of raising their dividends.

Many investors choose to buy their shares and reinvest the dividends through a DRIP (dividend reinvestment plan). If you buy shares in Coca-Cola, you’ll get a yield of about 2.7%. By reinvesting your dividends, you can increase your effective yield over time. You can do the same with PepsiCo and start with a slightly higher yield today at just under 3%.

In the last few years, Pepsi’s free cash flow payout ratio dropped from 58% to 56%. The company’s free cash flow has been growing at about 11% annually. Prior to 2008, 15% dividend increases were the norm. After 2008, the average increase was about 6%. Coca-Cola’s free cash flow payout ratio has increased from 62% to 66%. The company usually increased their dividend by over 11% until about 2008, and then 7.6% increases became the norm.

For Those Who Want More
However, what if you are an investor who is willing to take on more risk? Is there a way to trounce these yields of 2.7% and 3%? In short, yes there is, but it depends on what you think of options. By writing covered call options, you can potentially generate significantly more income than collecting dividends.

In order to “write” a covered call you have to own 100 shares of the stock. You essentially agree to rent your 100 shares to someone else for a certain amount of time. You “write” or “sell to open” the call option and you get paid a premium. The great thing about covered calls is you keep the premium no matter what happens.

What Do You Do?
First, you pick a price that you are willing to sell your shares at. Usually a price just above the current price gives you more income. You can use this strategy with Coca-Cola or PepsiCo, or go in a different direction and choose Sodastream International Ltd (NASDAQ:SODA).

For those who don’t know, SodaStream is the company that produces the popular SodaStream machines. In case you haven’t heard, SodaStream allows you to make soda or other sparkling beverages at home. The company suggests that their product is better for the environment, costs less per serving, is more convenient, and is a healthier option. The stock has done well recently, and the company has consistently beaten earnings estimates.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!