Like Dividend Stocks? The Payments for These 3 Dividend Kings Have Almost Never Been Better Than Right Now.

Many income investors are looking for a reliable dividend. For the record, it's not uncommon for a dividend-paying company to decrease the amount it pays or to cut its dividend altogether. But in my lifetime, that's never happened with the dividend payments from PepsiCo (NASDAQ: PEP), Target (NYSE: TGT), or Hormel Foods (NYSE: HRL).

All three of these dividend stocks have paid a quarterly dividend and increased it annually for over 50 years without fail. This puts all three of these companies on the list of Dividend Kings. In short, they're among the most reliable dividend stocks in the world.

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Now, each one is close to presenting a once-in-a-lifetime opportunity when it comes to how much it pays out relative to the stock price.

The dividend yield is an important metric. It shows how much money you get based on your investment. If someone invests $1,000 into a stock with a 2% dividend yield, they can expect $20 in annual dividends.

For what it's worth, 2% is roughly the average when it comes to dividend yield on the stock market. But the dividend yield for Pepsi, Target, and Hormel are all close to double the average. And each of these three is either at an all-time high or close to it.

PEP Dividend Yield data by YCharts

Considering that Pepsi, Target, and Hormel are Dividend Kings and the dividend payments have almost never been better, all three warrant a closer look from investors today.

The key question for each is whether profits can continue to rise long-term, enabling ongoing dividend increases. And as I'll explain, they can.

1. Pepsi

Pepsi owns more than 200 food and beverage brands, 22 of which generate over $1 billion in revenue annually. My point is that Pepsi is big so I won't cover every aspect of its business. But allow me to highlight just two areas that can help its profits improve in coming years.

First, Pepsi is investing in automation at its warehouses. A business this big and with this many products has a complex supply chain and warehouses are an often overlooked operating component. In recent years, many companies with warehouses, such as Amazon, invested in automation and those efficiencies contributed to improvements in profitability. Pepsi should enjoy the same boost.

Second, Pepsi has identified more than 10 up-and-coming international markets to invest for long-term growth. According to CEO Ramon Laguarta, 60% of the company's business comes from just 5% of the world's population. This is why it's investing in new markets management believes will drive almost all of its growth in coming years. And as these markets scale, it's reasonable to expect profits in those markets to also improve.

Pepsi's 3.6% dividend yield is quite attractive and its 53-year dividend streak is enviable. And with legitimate ways to grow its profits in coming years, Pepsi stock could keep its streak of dividend raises going to 60 years or beyond.

2. Target

A payout ratio refers to how much of a company's profits are used to pay the dividend. Target's payout ratio is the lowest of these three by far at only 50%, which is good. It means that management has plenty of breathing room to increase future dividend payments even if profits don't improve much from here. But again, Target does have a path for profit growth.

Perhaps Target's biggest opportunity is Target Plus. Consider that the company is already one of the largest retailers in the world and it does have an e-commerce presence. Big e-commerce businesses such as Amazon and Walmart don't only sell their own products online; they allow third-party merchant sales as well. That's what Target is now doing with Target Plus.

According to management, Target Plus is now a $1 billion business and is growing at a double-digit rate. Management also confirms that this marketplace business improves its overall profit margin -- that's not surprising considering it's margin accretive for retailers such as Walmart as well.

It's just a little thing. But it demonstrates that Target's profits could trend higher in coming years, which will likely be all the motivation that management needs to keep raising its dividend. Therefore, locking it in now at a 4.3% yield could be a great long-term move.

3. Hormel

The first Target store opened in 1962. By that time, Hormel had already been paying its dividend without fail for over 30 years. It's now closing in on 100 years without missing a dividend and management has raised its dividend for 59 consecutive years. That's impressive.

Granted, Hormel is facing headwinds now that will make it challenging to keep its streak alive. Bird flu is impacting the turkey industry, which is a big part of Hormel's business. Moreover, its more than $3 billion acquisition of Planters in 2021 still isn't living up to expectations. Both Hormel's gross margin and operating margin are consequently lower than their 20-year averages.

HRL Gross Profit Margin data by YCharts

Herein lies the opportunity for profit improvement. When it comes to turkey, it's reasonable to expect the bird flu problem to end at some point, eliminating the headwind. With Planters, it made progress during the holiday quarter by launching limited-time branded items and hopefully it can maintain this momentum.

This is where Hormel sees opportunities for profit growth: value-added items. In other words, there's demand for packaged food that's already prepared rather than just raw ingredients. This includes the different ways it can package nuts with its Planters business. But it extends into all areas of its business.

This year, Hormel could spend up to $300 million on capital expenditures, and much of this spend is to build manufacturing capacity for higher-margin, value-added products. As it fills its distribution network with these higher-margin products, Hormel's profits could tick higher.

Of these three stocks, Pepsi is likely the safest thanks to its broad portfolio and scale. Target appears to be the cheapest, which might appeal to some. That leaves Hormel as perhaps the least attractive. That said, I'm a fan of Hormel's Spam, and I may find it hard to pass up a chance to be a long-term shareholder with the dividend yield up near 4% for the first time in my lifetime.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool has a disclosure policy.