2 Dividend Stocks to Double Up on Right Now

Many investors turn to dividend stocks once they prioritize income generation. Since these types of stocks have to generate enough free cash flow to make periodic dividend payments, they tend to be more stable than growth stocks. Additionally, some of these stocks hike their payouts periodically, and this can serve as a source of inflation protection over time.

This is the case with both Realty Income (NYSE: O) and PepsiCo (NASDAQ: PEP). Not only do they offer yields that far exceed the 1.1% average dividend yield of the S&P 500, but they also have the backing of strong underlying businesses that could bring stock-price appreciation over time.

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Realty Income

Realty Income is known as the "monthly dividend company." As the name implies, the real estate investment trust's (REIT) portfolio, comprising over 15,500 single-tenant properties, provides a stable source of income.

Realty Income owns net-leased properties, which means that tenants cover maintenance, insurance, and property taxes. This provides more stable cash flow. Also, since companies like Walmart, Home Depot, and Dollar General occupy its properties, the REIT benefits from a solid tenant base. Currently, occupancy rates are almost 99%, prompting it to acquire and develop properties.

With this growth, its funds from operations (FFO) income, a measure of its free cash flow, was $4.20 per share over the trailing 12 months. That was enough to cover the current annual dividend rate of just over $3.23 per share. Moreover, Realty Income's dividend yield is approximately 5.4%, which is almost five times the S&P 500 average.

Investors should remember that the dividend has risen at least once per year since its inception in 1994. On top of that, the stock trades well below its high in early 2020, a likely result of the interest-rate hikes earlier in the decade. This means investors can buy this stock at a discount while benefiting from what should remain a rising payout.

Now is also an excellent time to buy this stock since interest rates are again trending downward. Lower rates should create an opportunity to refinance some of the company's debt, which should boost profits. Since the stock trades at around 18 times the company's FFO income, rising profits could prompt Realty Income's stock to rise, potentially making it an attractive growth-and-income investment over the next few years.

PepsiCo

PepsiCo is best known for its flagship cola drink. Nonetheless, the company is a beverage-and-food conglomerate that owns more than 500 brands. Product lines such as Gatorade, Mountain Dew, Aquafina, Quaker, and Doritos are under the PepsiCo umbrella.

While investors may consider this type of business recession-resistant, it has faced its share of struggles. Consumers have increasingly questioned the nutritional value of many of its products, and such concerns have weighed on its sales. Additionally, the company has faced food inflation, meaning costs have risen as sales have suffered.

The company has responded with initiatives to revitalize key brands. It has also worked to cut costs by incorporating more artificial intelligence (AI) in its production processes and closing some plants.

Fortunately, the dividend appears safe, though it has become more of a burden. Over the trailing 12 months, PepsiCo generated just over $7.2 billion in free cash flow, just under the current dividend cost of about $7.5 billion. Hence, it's critical to increase free cash flow to maintain the 53 years of payout hikes that gave it Dividend King status.

Fortunately, companies tend not to abandon such streaks if avoidable. Since PepsiCo has about $8.7 billion in liquidity, the payout will most likely continue rising. At an annual payout of $5.69 per share, it yields about 3.9%.

Furthermore, the fact that PepsiCo is more than 25% below its all-time high in 2023 has raised the dividend yield somewhat. The stock has a price-to-earnings ratio (P/E) of 27 -- not necessarily a bargain, but still less than its average P/E of 30 over the past year.

If PepsiCo can succeed in cutting costs and reinvigorating growth, it should be able to increase free cash flow. That should position investors to collect increasingly generous dividends and earn returns during an eventual recovery in PepsiCo stock.

Will Healy has positions in Realty Income. The Motley Fool has positions in and recommends Home Depot, Realty Income, and Walmart. The Motley Fool has a disclosure policy.