The Smartest Dividend Stocks to Buy with $5,000 Right Now

When a company makes a profit, it may pay a portion to shareholders in the form of dividends. This is a nice reward for shareholders, providing regular income. However, it’s still important to choose strong companies that not only maintain dividends, but regularly increase them through higher earnings and cash flow.

These three actions match. Two of them are the Dividend Kings, an illustrious group of companies that have collected dividends for at least 50 consecutive years.

You don’t even have to start with a huge amount of money to reap the rewards. Investors starting with $5,000 can own shares in these three dividend-paying stocks.

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1. Coca-Cola

In existence since the late 1800s, Coca cola (K.O -0.62%) sells beverages worldwide under popular brands such as namesake, Sprite and Fanta. While people think of it as a soda company, its products also include items like water, juices, and other beverages.

While the business may no longer be growing rapidly, Coca-Cola has increased sales and gained market share. It continues to grow profitability, including a 17% gain in the second quarter after items such as currency translation effects are removed.

This translated into a lot of free cash flow (FCF). In the first six months of the year, Coca-Cola’s FCF was $3.3 billion. This easily covered the $2.2 billion in dividends.

The board has raised payouts for 62 consecutive years, including a more than 5 percent increase earlier this year to $1.94 annually. Coca-Cola stock has a dividend yield of 2.7%, more than double S&P 500is 1.3%.

2. Merck

Merck (MRK -0.67%) makes drugs, including the popular Keytruda, which is used to treat various types of cancer. Last year, the drug generated $25 billion in revenue, up 19.5 percent from the previous year.

Merck’s second-quarter sales, excluding currency translation, rose 11%. Fortunately, business results don’t fluctuate with the business cycle because people need Merck’s important treatments. It is no exaggeration to say that it is a matter of life and death in some cases.

Keytruda remains an important growth driver, and its sales accounted for 45% of the top line in Q2. But Merck has other drugs, including the popular Gardasil vaccine. It also has other treatments in the pipeline and received approval for Winrevair, which is used to treat pulmonary arterial hypertension, earlier this year.

Merck generates plenty of FCF to support dividends. In the first half of the year, it had $7.1 billion in FCF and paid out $3.9 billion in dividends.

The company has increased dividends for several years. This year, Merck’s quarterly payout was $0.77, up 5.5% from last year. The stock has a dividend yield of 2.6%.

3. PepsiCo

PepsiCo (PEP 0.55%) sells drinks, snacks and other food products. These include soda, chips, cereal and granola bars under well-established brands including Pepsi, Mountain Dew, Aquafina, Doritos and Quaker.

The company’s adjusted earnings per share rose 10% in the second quarter despite sluggish sales growth of 2%. However, the subdued top-line growth appears to be temporary, based on broad economic factors. Consumers have been stretched by higher prices, as have other companies such as McDonald’s they reported. With PepsiCo’s strong brands holding shelf space, sales volume will undoubtedly increase.

Meanwhile, shareholders can enjoy the dividend yield of 3.1%. And management and the board had enough confidence in the future outlook to announce a 7% dividend increase in April. It has paid dividends since 1965 and collected them annually for 52 consecutive years.

PepsiCo can easily afford the payments. Its shares have a payout ratio of 73%.