Motley Fool: A dependable income and a smile

Coca-Cola (NYSE: KO) belongs to an elite group of companies that have increased their dividends annually for at least 50 consecutive years.

The stock had a recent dividend yield of 3.1%, more than double the S&P 500’s dividend yield of 1.5%.

Of course, an above-average yield means nothing if the stock declines substantially. But Coca-Cola is on solid financial footing, and it has reasonable growth prospects for a 132-year-old company.

Don’t buy shares expecting rapid price appreciation – the stock has actually lagged the S&P 500 for most of the past decade. But over the years to come, it’s likely to keep growing in value, and the dividend is likely to continue rising, as well.

Coca-Cola has an iconic brand, unparalleled distribution capabilities and a leadership position in the market.

Those qualities create pricing power and allow the company to consistently earn a higher profit margin than its peers.

Greater profitability allows Coca-Cola to reinvest more heavily in strategic growth areas, such as emerging markets across Latin America and the Asia-Pacific region.

The company is also pursuing opportunities in noncarbonated beverage categories such as coffee (Costa) and sports drinks (Powerade, Bodyarmor).

Additionally, Coca-Cola recently started experimenting with alcoholic beverages. Coca-Cola’s stock isn’t likely to grow in value dramatically over the years, but it is likely to grow – while delivering some dividend income, as well.

Ask the Fool

Q. What does “tax efficiency” mean for a mutual fund? – K.R., Dayton, Ohio

A. The tax efficiency of a mutual fund describes what portion of the fund’s profits is taxable. A fund with a low rate of buying and selling will generate fewer (or smaller) taxable distributions of gains or losses to shareholders, and is said to be “tax-efficient.”

Funds focused on generating income will often be less tax-efficient because the dividends and interest they collect and send to shareholders are typically taxable.

Index funds are often more tax-efficient, as they do less buying and selling. (A fund’s tax efficiency is often related to its “turnover ratio” – how long the fund’s managers keep securities in the fund after buying them. A low turnover ratio reflects less buying and selling activity, and, likely, a more tax-efficient fund.)

You needn’t worry much about tax efficiency in tax-deferred accounts such as traditional IRAs or 401(k)s.

Dividends, interest and capital gains accumulate in those on a tax-deferred basis until you withdraw your money (or can be tax-free with Roth accounts).

Such accounts are good places for your least tax-efficient investments, such as stocks you plan to hold for less than a year and mutual funds with significant short-term capital gains, dividends or taxable bond interest.

Q. What’s a “market maker”? – A.C., online

A. When you buy or sell stocks, your shares are not directly exchanged with another investor. Instead, the transaction is typically conducted through a market maker, an individual or company that buys securities from sellers and sells securities to buyers.

This keeps the market fluid. Market makers do this to profit via “the spread” – the (typically small) difference between the purchase and sale prices in a transaction.

My Dumbest Investment

My most regrettable investing move was not paying attention to SunEdison and Peabody Energy before they filed for bankruptcy protection. Now I’m stuck! – S., online

The Fool responds: Ouch. Both of those companies faced serious challenges and ended up filing for bankruptcy protection.

Renewable energy enterprise SunEdison ran into trouble after aggressively trying to grow by taking on debt to buy other companies.

Coal producer Peabody had also taken on heavy debt, in part to expand in Australia, and was hurt by falling coal prices.

As you learned the hard way, it’s important to keep up with your holdings – ideally, at least every quarter.

Many people who weren’t paying attention in the past ended up surprised when major companies such as Delta Airlines, General Motors, Hertz, Kodak, J.C. Penney, Pan Am and Texaco filed for bankruptcy protection.

If you keep up with your investments by reviewing financial statements and news stories, you’ll be more likely to notice when a company is struggling.

It’s often better to hang on when troubles seem temporary, but more worrisome problems might cause you to sell.

It’s true that lots of companies file for Chapter 11 bankruptcy protection only to emerge later and continue operating – but if they do, new stock is typically issued, and pre-bankruptcy shareholders often find themselves with little to nothing.