Motley Fool: Red can, blue chip

If you’re looking for steady income from a stock, pop open some shares of Coca-Cola (NYSE: KO). Coca-Cola stock was recently sporting a healthy dividend yield of over 3.1%, and that payout has been increased for 59 consecutive years.

Coca-Cola might seem like a risky investment, since soda consumption rates have been declining in recent years. However, via acquisitions and internally developed products, the company has been expanding its beverage portfolio into fruit juices, teas, sports drinks, bottled water, coffee and even alcoholic drinks.

It’s also refreshed its flagship sodas with lower-calorie versions, new flavors, smaller serving sizes, and new variants such as Coca-Cola Energy and Coca-Cola With Coffee. These moves, along with an investment in Monster Beverage and the takeover of coffee company Costa Limited, enabled Coca-Cola to aggressively evolve and expand its business.

The company’s revenue declined 11% in 2020, as the pandemic shut down restaurants and other businesses that served its drinks. This year, analysts expect Coca-Cola’s revenue and earnings per share to increase 11% and 10%, respectively, as the pandemic eases and businesses reopen. The stock recently seemed reasonably valued, with a forward-looking price-to-earnings (P/E) ratio near 24, and it should be a fairly safe investment for retirees and others looking for steady growth and income.

Ask the Fool

Q: How can an IPO be “underpriced”? – D.D., Kenosha, Wisconsin

A: Companies traditionally “go public” – introducing their shares for trading on the public stock market – via initial public offerings, or IPOs.

Here’s how it typically works: The company hires an investment bank (like Goldman Sachs), which may bring in some other banks. The company and the banks decide how they’ll price the shares. Let’s say they’ve determined the company is worth $10 billion and they’re selling 10% of it to the public to raise $1 billion (less the banks’ fees). They might, say, sell 100 million shares at $10.

On the first day of trading, initial buyers will get their shares at the offering price. That raises the expected sum for the company ($1 billion, in our example). After that, the shares will be traded on the market, directly between buyers and sellers, without raising any more money for the company. If there’s great demand, buyers will be willing to pay more, sending the price up.

When a company’s shares soar on its IPO day, that suggests that they were underpriced; it could have set a higher initial price, and that would have generated more money for the company.

Q: Do I need to work for a company to buy its stock? – L.A., Greenwood, South Carolina

A: Not at all. Any of us can buy any stock that’s publicly traded – as long as we can afford it. You’ll probably need a brokerage account, though. (Learn more about brokerages at Broker.Fool.com.) However, if you work for a publicly traded company, you might be granted shares of stock or stock options, or you might be able to buy its shares at a discount.

My smartest investment

My smartest investment move was investing half of my first year’s salary. – S.S., online

The Fool responds: That’s a super-smart move, indeed! A common rule of thumb is to sock away 10% of your income, but that’s often far too little for those starting to invest later in life.

Young folks might get away with saving only 10% annually, but if you’re able to save 50% even once, or a few times – perhaps while living with your parents or roommates – it can be an extremely powerful financial move. That’s because the dollars you invest earliest have the longest period in which to grow for you.

Imagine having invested $10,000 when you’re 25; it can grow at an annual average of 8% over 35 years to be nearly $148,000 when you’re 60. If that $10,000 is invested at age 40, though, it will only have 20 years to grow, reaching about $46,600 by age 60.

It’s not enough to just be saving aggressively; you need to be investing all that money effectively, too. Long-term dollars are likely to grow fastest in the stock market, and a low-fee broad-market index fund, such as one that tracks the S&P 500 index, is a simple and powerful way to build wealth through stocks. Starting an investment portfolio early can make the rest of your financial life much easier and less stressful, with funds available for down payments and retirement.