Owning shares in companies that pay dividends can be a great way of earning passive income. And even in cases where returns today might not look like much, they can add up over time.
I’ve got a couple of dividend stocks on my radar that I think could be great investments for the next decade. One is a FTSE 100 bank and the other is a Warren Buffett favourite.
Lloyds Banking Group
Shares in Lloyds Banking Group (LSE:LLOY) currently come with a 5.25% dividend yield. But investors should be a little bit careful, as the dividend has been up and down over the last 10 years.
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Over the last decade, Lloyds has distributed an average of 1.98p per share in dividends each year – an average yield of around 4.12% at today’s prices. I think there are reasons to expect better going forward.
I anticipate interest rates being higher (on average) for the next 10 years than they have been since 2014. And this should be positive for both margins and profitability across the banking sector.
There’s a risk those higher rates might result in greater charges for loan losses. And it’s also worth noting that competition for consumer deposits is intensifying in the UK.
Some of this risk should be offset by the cuts in interest rates that investors are expecting this year, though. And the company’s share count is lower now than it was in 2014.
As a result, even if overall distributions remain the same, dividends per share should be higher. I’m already heavily invested in banks at the moment, but if I weren’t, I’d be buying the stock today.
Coca-Cola
Warren Buffett’s beloved Coca-Cola (NYSE:KO) is a different type of business. Unlike Lloyds, the company has increased its dividend steadily over the last decade – and much longer than that.
The stock currently trades at a a price-to-earnings (P/E) ratio of 21, which is below its 10-year average of 23. I suspect this is because investors are concerned about GLP-1 drugs.
Lower demand for Coca-Cola products as a result of anti-obesity medication is a risk investors are right to take seriously. But I think the company’s growth prospects outweigh the danger.
In my view, it’s easy to underestimate those growth prospects – after all, how much more Coca-Cola can the US consume? But this misses the point in two ways.
The first is that the business has good scope for growth in emerging markets. And the second is that it’s expanding outside its core categories – a good example being Costa in the UK.
I think this means the dividend is likely to grow over the next decade. It looks to me like the market is overestimating the effects of GLP-1 drugs, which is why I’d buy the stock today.
Dividend stocks
Not all dividend stocks are the same. Some offer a consistent income stream that rises every year, whereas others have cyclical highs and lows.
I think either can be a great opportunity, though. And owning either Lloyds or Coca-Cola shares looks to me like a great way for investors to make money while they sleep.
