1 Magnificent S&P 500 Dividend Stock Down 11% to Buy and Hold Forever

It's tough to go against the crowd. It takes the courage in your convictions when everyone else is going in a different direction.

That's especially true when it comes to investments since you'll have your hard-earned money on the line. However, if you do your homework, bucking the investment trend can prove profitable.

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PepsiCo (NASDAQ: PEP), a member of the S&P 500, has seen its stock price lag the index. However, dividend-seeking investors may find this presents a compelling opportunity.

Image source: Getty Images.

Weary consumers

PepsiCo's share price has lost 11.3% over the last year through Jan. 17. During this span, the S&P 500 gained 27%. However, the stock's underperformance is likely due to the company's tepid sales as consumers pulled back on spending. That's because they pushed back against inflationary pressures, particularly higher food and housing costs. After all, it's hard to pay more for drinks and snacks when items like eggs and rent take a bigger bite out of your wallet.

You can see the effects on PepsiCo's sales. Its fiscal third-quarter top line increased 1.3%, after stripping out items like foreign currency exchange translation. The results covered the period ended on Sept. 7, 2024.

Breaking out the sales increase, you can see the pushback against higher prices. Increased prices added about 3 percentage points, but lower volume subtracted 2 percentage points.

This has been a broad trend among consumer discretionary companies, and certainly PepsiCo's not the only company feeling the effects of broad inflation. Others such as Home Depot and McDonald's saw their sales impacted as consumers divert spending to everyday items.

There have been signs inflation, while remaining higher than the Federal Reserve would like, has stabilized. As these pricing pressures ease, consumers will likely return to their normal spending patterns.

That will undoubtedly benefit PepsiCo. Fortunately, it has broad and well-known offerings that resonate with consumers. These include its namesake beverage, Gatorade, Quaker Chewy granola bars, and Doritos. It's hard to imagine people giving up these products.

Collecting dividends

While waiting for sales growth to pick up and the stock price to appreciate, PepsiCo's shareholders can confidently rely on dividend payments. Last year, the board of directors increased the quarterly payouts by 7% to $1.355.

That marked 52 straight years with a dividend hike, making PepsiCo a Dividend King. Certainly, the payments have become an important way to reward shareholders, and its 76% payout ratio indicates they aren't in danger of getting cut.

PepsiCo's stock has an attractive dividend yield compared to the market. The shares have a 3.7% yield, more than 3 times the S&P 500's 1.2% yield.

Better valuation

PepsiCo shares trade at a better valuation than a year ago. Its price-to-earnings (P/E) ratio dropped from nearly 26 to 22 during this time. Meanwhile, the S&P 500 trades at a 31 multiple.

The shares also trade at a lower valuation compared to the last decade. PepsiCo's stock has a 10-year median P/E ratio of 26.

If it was facing company-specific issues, the stock would merit a discounted valuation, and I'd be wary. However, short-term factors affecting consumer discretionary spending are at work. That's why investors with an eye on the long term should seize the opportunity. After all, you can collect dividends while waiting for the consumer discretionary spending trend to improve.

Don’t miss this second chance at a potentially lucrative opportunity

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Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

Learn more »

*Stock Advisor returns as of January 21, 2025

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.