Why I'm Buying This Top Dividend Stock Hand Over Fist Right Now

I buy a lot of dividend stocks each year. They provide me with passive income that I use to buy more shares of dividend-paying companies. Dividend stocks have also historically produced much higher returns than non-dividend payers, with less volatility.

One dividend stock I can't seem to buy enough of right now is PepsiCo (NASDAQ: PEP). I've bought shares several times this year and will likely continue adding to my position.

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Here's why I've been loading up on Pepsi stock.

A satisfying income stream

PepsiCo has a terrific track record of paying dividends. The beverage and snacking giant announced plans last month to raise its dividend by 5% in June. That will extend the company's dividend growth streak to 53 straight years. It will keep PepsiCo in the elite group of Dividend Kings -- companies with 50 or more years of delivering annual dividend increases.

The company's new annualized dividend rate will be $5.69 per share. With its stock price recently around $145 apiece, PepsiCo has a forward dividend yield of 3.9%. That's a very enticing level. It's about three times higher than the S&P 500 (SNPINDEX: ^GSPC), which currently has a 1.3% dividend yield.

PepsiCo generated $12.5 billion in net cash from operating activities last year, more than covering the $7.2 billion it paid in dividends. The company also has a strong cash-rich balance sheet. It ended last year with nearly $9.3 billion in cash and short-term investments and has very healthy bond ratings (A+/A/A1). The company's strong cash flows and balance sheet give it lots of flexibility to invest in growing its business.

Built to continue growing

PepsiCo should have no trouble increasing its dividend in the future. The company's long-term target is to organically grow its revenue by 4% to 6% per year. It also expects to steadily expand its margins, which should drive annual earnings-per-share growth in the high single digits.

The company invests heavily to support its continued growth. PepsiCo's capital spending was $5 billion last year, which was about 5.4% of its revenue. The company spent that capital on initiatives that drive growth and productivity throughout its business.

For example, like most companies, Pepsi is investing in artificial intelligence (AI) for things like AI-generated forecasts. It's also investing in increasing its manufacturing capacity and new product innovation.

PepsiCo is also using its financial flexibility to make acquisitions to accelerate growth. The company recently agreed to buy fast-growing low-calorie soda brand Poppi for about $1.7 billion to expand its better-for-you offerings. The company also recently closed its $1.2 billion purchase of Siete Foods to further expand its food portfolio. Meanwhile, it bought out the remaining 50% interest in Sabra and Obela that it didn't already own late last year, to expand its refrigerated fresh dips and spreads business.

The company's cash flow and strong balance sheet give it the financial flexibility to continue making acquisitions to enhance its portfolio and growth profile as opportunities arise.

A great deal

Shares of PepsiCo currently trade about 25% below their all-time high, despite the continued growth of its business. That's one reason why it offers such an appetizing dividend yield. That lower price point also has PepsiCo stock trading at an enticing valuation. It currently sells for about 17.5 times forward earnings.

That's a lot cheaper than the broader market. The S&P 500 currently sells for around 21 times forward earnings, while the Nasdaq-100 fetches more than 25 times forward earnings.

Given its lower relative valuation, PepsiCo could outperform in the future. With its earnings per share likely growing by 7%-9% each year and its dividend yield close to 4%, the stock could easily deliver total annual returns above 10% before any valuation expansion. Given its strong financial profile, excellent dividend track record, and portfolio enhancements, PepsiCo should trade at a premium valuation.

A great time to buy this top dividend stock

PepsiCo has been satisfying income-seeking investors for more than 50 years. Given its strong financial profile and continued growth investments, I expect the company to continue paying a growing dividend in the future. I want more of that growing income stream in my portfolio, especially considering its stock trades at such an enticing valuation and dividend yield. That's why I'm buying shares hand over fist these days, and will add even more if the stock gets even cheaper.

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Matt DiLallo has positions in PepsiCo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.