Diageo (LSE:DGE) is the dividend stock with an excellent track record. Here’s why I would add the shares to my holdings to boost my passive income stream.
Alcoholic beverage business
Diageo is one of the largest alcoholic drinks businesses in the world. Some of its best known brands include Guinness, Smirnoff, and Johnnie Walker to mention just a few. It has a worldwide presence with operations in approximately 180 countries. North America accounts for the majority of its sales.
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So what is happening with the Diageo share price currently? Well, as I write, the shares are trading for 3,627p. At this time last year, the shares were trading for 3,409p, which is a 6% increase over a 12-month period.
A dividend stock with risks
As with any dividend stock, and Diageo is no different, it must be noted that dividends are paid at the discretion of the company and can be cancelled at any time. This is why I look for high quality businesses with a good track record, rather than just the highest dividend yield.
Next, Diageo is at the mercy of macroeconomic headwinds due to soaring inflation worldwide. This has led to an increased cost of raw materials, which are essential to creating its drinks. If costs go up, performance and profit margins are squeezed. This could affect any passive income I hope to make, especially as performance underpins payouts.
The bull case
For any dividend stock, I always look at recent and past performance. I do understand that past performance is not a guarantee of the future, however. Looking back, Diageo has consistently recorded revenues close to and in excess of £12bn. Revenue for 2020 came in slightly lower due to the effects of the pandemic.
Coming up to date, Diageo released a half-year report for the six months ended 31 December 2021 in January. Net sales, operating profit, and cash generation all increased compared to the same period last year. Full-year results are due in the coming months and I would not be surprised to see growth from 2021 figures.
What I particularly like about Diageo is its profile and presence. It has exceptional brand power and has a worldwide customer base. I believe this is crucial to continuing performance growth and maintaining its dividend record.
Let’s take a closer look at Diageo’s dividend fundamentals then. Firstly, it has a dividend yield of just over 2%. This is by no means the highest but I am buoyed by its dividend growth record and consistency of payouts. Diageo has grown its dividends by 6% per year since 2012.
A dividend stock I’d buy
Looking to boost my passive income stream is an important part of my investment mantra. I believe Diageo shares do just that and therefore I’d happily add the shares to my holdings.
I think the rewards outweigh the risk when it comes to Diageo shares. Exceptional brand power, which drives performance and boosts dividends, should mean I can expect to receive consistent payouts in the long term. I believe Diageo is an underrated dividend stock, mainly due to its lower dividend yield.
