A lifetime of passive income is hiding in plain sight with this ETF and these 2 clueless dividend kings

This has been another great year for the broader stock market, with S&P 500 and Nasdaq Composite both are up over 20% year to date. And with just one quarter left in 2024, the broader indexes could go nowhere or even fall slightly, and it would still be a great result, given that the long-term average annual return in the S&P 500 is around 10%.

New all-time highs are great if you already have a good amount of money invested in the market, but it’s a challenge if you want to put new capital to work without overpaying. The good news is that there are plenty of dividend-paying stocks and exchange-traded funds (ETFs) that are still good value.

PepsiCo (PEP -0.60%) and Water of the American States (AWR -0.84%) are two dividend kings that have paid and increased their dividends for over 50 consecutive years, while ETF Global X SuperDividend (SDIV -1.01%) has international exposure to a variety of high yielding names. Here’s why these three fool.com contributors think they deserve a closer look.

Image source: Getty Images.

A buy, although the results failed to impress

Daniel Foelber (PepsiCo): The S&P 500’s price-to-earnings (P/E) ratio is 29.9, suggesting the market is expensive compared to historical averages. As stock prices outpaced dividend growth, the S&P 500 yield fell to just 1.3%.

Investors looking for value and passive income can often rely on safe and heavy sectors such as consumer staples, healthcare and utilities. But even those sectors are hitting all-time highs, which has driven up their valuations and driven down their yields.

PepsiCo is a rare blend of reliability, high yield and value. It has 52 consecutive years of dividend increases, currently yields 3.2% and has a P/E of 24.7. By comparison, an ETF in the consumer staples sector has a yield of 2.6% and a P/E of 28.3.

When a well-known stock is undervalued relative to its peers, chances are it’s not a fluke. Although PepsiCo has done a good job of navigating inflation and cost-conscious consumers, its sales and earnings growth have been quite disappointing. As you can see in the following chart, PepsiCo’s dividend has more than doubled over the past decade, but sales and earnings growth have been relatively weak.

PEP Dividend Data by YCharts; TTM = last 12 months.

The share price has gone virtually nowhere for three years, compared to solid gains in the consumer goods sector. So some investors might wait for a noticeable improvement in the underlying business before buying shares.

This fiscal year, PepsiCo is targeting earnings per share growth of at least 8% on a constant currency basis, which would be a step in the right direction. But the company likely still has a long way to go before it starts beating investors’ expectations.

PepsiCo may be out of the game right now, but the company’s supply chain, marketing and distribution give it a major advantage in growing existing brands and innovating or acquiring new brands.

Now is a great time for patient investors to buy PepsiCo if they have confidence in the company’s international food and beverage portfolio, which includes Frito-Lay and Quaker Oats.

This utility’s reign as dividend king is unlikely to end anytime soon

Scott Levine (American States Water): Companies that have earned the title of Dividend King are among an elite group that have demonstrated impressive commitments to shareholders. Among this group, American States Water is a utility that reigns supreme, having amassed the longest streak of consecutive annual dividend increases: 70 years.

Those looking to generate a reliable stream of passive income for decades will definitely want to consider dipping their toes into American States Water and soaking up its 2.3% forward yield dividend.

A key reason why the utility is so attractive for its dividend potential is its business model. Operating mainly in regulated markets, it is guaranteed certain rates of return on its investments. It provides water and wastewater services under 50-year contracts to 12 US military bases — another encouraging sign for the company’s prosperity. And since many military bases are not privatized, management recognizes ample opportunity to achieve growth with this type of business.

Looking at its recent performance, investors will find appeal in the reliable nature of the utility’s business. Over the past five years, adjusted earnings per share grew at a compound annual growth rate (CAGR) of 9.8%, from $1.72 in 2018 to $2.75 in 2023.

And management’s focus on increasing payouts at the same rate demonstrates a financially responsible approach to rewarding shareholders. Over the same five-year period, American States Water grew its dividend at a CAGR of 8.8%, during which it posted an average payout of 56.5%.

American States Water deserves serious consideration for those looking to find a conservative approach to generating a lifetime passive income stream.

A dividend ETF with a yield of 6.1%

Lee Samaha (Global X SuperDividend ETF): Picking winners in the high-yield equity sector is never easy. After all, there’s often a reason why the market assigns a stock a high yield, and it usually reflects concern that the dividend is unsustainable. As such, it makes sense to diversify your stock-specific risk by holding more stocks.

While this could prove costly in practice, purchasing a high-yield exchange-traded fund (ETF) like the Global X SuperDividend ETF is always possible.

The fund’s strategy is to buy the 50 highest-yielding US stocks and pay a monthly distribution to investors. Currently yielding 6.1% and with a reasonable expense ratio of 0.45%, the fund offers a good way to gain exposure to high-yield stocks.

As always, any mechanics-based strategy tends to result in an unintended style or sector bias. In this case, following a high-yield strategy, nearly 67% of the ETF’s holdings are in utilities, real estate, energy and consumer staples.

By contrast, only 2% are in information technology and 1.7% in consumer discretionary. However, if you want high yield stocks, monthly income and exposure to interest rate sensitive stocks, then the Global X SuperDividend ETF is a good option and capable of generating solid returns over the long term.