Truly passive income is hard to find in most business endeavors, but it is a built-in feature in stock market investing. Nearly every member of the Dow Jones Industrial Average pays a steady dividend, for example, providing you with immediate cash flow from simply holding the stock.
Yields on many Dow stocks are modest, to be sure, and currently hover at around 2% to 3%. Yet patient investors can watch those dividends increase over many years, ideally while reinvesting their payouts to accrue more shares. Combined with decent capital appreciation, in a decade or two you can have a major source of passive income flowing directly from your dividend portfolio.
If that sounds appealing, consider putting about $11,000 to work right now in Procter & Gamble (PG -0.77%) and Coca-Cola (KO -0.45%) stocks. In a year, these two stocks will reward you with $300 in passive income.
1. Procter & Gamble
Millions of people around the world use several of Procter & Gamble’s brands daily. From toothpaste to diapers, skin care products to laundry detergents, the company dominates dozens of consumer staples niches today — just as it has for decades.
That premium market position pays handsome returns. In late January, P&G announced that organic sales trends landed right at management’s forecast, up 4% through late December. The company is seeing modest demand pressure as shoppers look to stretch their budgets, but it is mostly succeeding at passing along higher prices. Profit margins rose this past quarter thanks to a combination of cost cuts and price increases, helping push earnings higher by 16%. P&G converts nearly all its earnings into cash flow, which last quarter was a robust $5.1 billion.
P&G can afford to send most of its excess cash to shareholders through a mix of dividends and stock buybacks. Investors can expect roughly $14 billion of spending in these areas in fiscal 2024. Putting $5,500 into the stock right now would deliver about $135 of annual passive income, with likely many more years of dividend growth ahead.
Investing a similar amount into Coca-Cola would result in annual passive income of roughly $165. You can feel confident that this payout will rise in the coming years, too. Like P&G, Coke has boosted its dividend annually for over 60 consecutive years, giving it a spot in the exclusive list of Dividend Kings.
You don’t have to sacrifice growth or financial strength when owning this mature business, either. Coke management forecasts double-digit organic sales gains this year following last year’s 16% spike. This boost is coming from a healthy mix between rising prices and increased sales volumes, which is a testament to Coke’s stellar pricing power.
Coke is among the most profitable consumer-focused companies around. Operating profit margin is near 30% of sales, or double the rate that PepsiCo enjoys. The company is on track to produce about $10 billion of free cash flow this year, with most of that cash going directly to shareholders via dividend payments.
The stock is attractively priced after having underperformed the market in 2023. Wall Street is more interested in high-growth tech stocks right now due to expectations for a stronger economy in 2024. But income investors can take advantage of this short-term mindset and pick up a few excellent dividend payers at a relative discount, then just patiently allow compounding returns to do their thing over the next several years.