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Why PepsiCo is one of the best dividend stocks

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Dividends and share repurchases

PepsiCo (PEP) has a great track record of rewarding investors with higher dividends and share buyback plans. Share repurchases or buybacks reduce the number of outstanding shares and enhance profitability metrics like earnings per share (or EPS). In fiscal 2014, PepsiCo returned $8.7 billion to shareholders, including $3.7 billion in the form of dividends and $5.0 billion through share repurchases. This reflects a 36% rise compared to 2013.

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PepsiCo’s dividend growth

PepsiCo is a dividend aristocrat, which is a term used for a company that has increased its dividends for 25 years in a row. PepsiCo’s dividend has increased for 42 consecutive years. The company increased its 2014 dividend per share by 13.1% to $2.53 compared to the prior year. This growth in dividends is supported by the company’s strong free cash flows of about $7.7 billion.

PepsiCo is the second largest component of the Vanguard Dividend Appreciation ETF (VIG). The Consumer Staples Select Sector SPDR Fund (XLP) has 4.66% holdings in PepsiCo.

Dividend yield

Dividend yield indicates how much cash flow investors receive for each dollar they invest. PepsiCo’s dividend yield of 2.61% is greater than consumer staple peers like Dr Pepper Snapple Group (DPS) and Mondelez International (MDLZ), which have a dividend yield of 2.29% and 1.65%, respectively. However, PepsiCo’s dividend yield is lower than beverage giant Coca-Cola (KO), which has a dividend yield of 2.89%.

Future returns to shareholders

In 2015, PepsiCo plans to return $8.5 to $9 billion to shareholders through dividends and share repurchases. The company has announced a 7.3% percent increase in its annualized dividend to $2.81 per share, beginning with the June 2015 payment. Share repurchases will likely be around $4.5 to $5 billion in 2015. PepsiCo also announced a new share buyback plan, which allows for the repurchase of up to $12 billion of PepsiCo common stock beginning July 1, 2015, and expiring on June 30, 2018.

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