Why I'd buy dividend stocks Shell and Coca Cola HBC AG

One of US billionaire Warren Buffett's most famous investments is his large stake in TheCoca-Cola Company, which he acquired in 1988. His original $1bn is now worth nearly $18bn. Share buybacks mean that Mr Buffett's holding now gives him a stake of about 9.4% in the soft drinks giant.

We can't go back in time and copy one of his most successful trades. But what if we could find our own Coca-Cola opportunity on this side of the pond?

This could be real

A good starting point might be Coca Cola HBC AG (LSE: CCH), which bottles Coca-Cola drinks for 28 countries, including most of Central and Eastern Europe. It's a big business, with 55 bottling plants and 169 warehouses and distribution centres.

Figures released today show that the group had a good year in 2017. Sales rose by 4.9% to EUR6,552m, while volumes were 2.2% higher at 2,104.1m cases. Operating profit surged ahead by 16.5% to EUR589.8m, lifting the group's operating margin by 0.9% to 9%.

One area of concern for shareholders has been the group's debt. The good news is that net debt fell by 28% to EUR751.8m last year. This improved financial strength is reflected in the dividend, which has been increased by 23% to EUR0.54 per share.

I might buy

I've often looked at this stock in the past, but dismissed it as too expensive. However, the group's share price has fallen by 14% since peaking last September. The shares are now starting to look more affordable.

Today's results put the stock on a P/E of 20.9 with a dividend yield of 2.1%. That's hardly cheap, but earnings are expected to rise by another 11% in 2018, bringing the forecast P/E down to 19.

I may still wait to see if the shares get cheaper, but I believe Coca-Cola HBC is now worth considering as a long-term buy.

This could be a bargain income buy

FTSE 100 oil and gas giant Royal Dutch Shell (LSE: RDSB) has fallen by about 12% from the high of 2,617p seen in early January. This has left the stock trading on a more affordable forecast P/E of 13.5, with a dividend yield of 5.9%.

One year ago, some investors questioned the safety of this cash payout. However, Shell's recent results made it clear that this dividend should now be very safe indeed. The group's adjusted earnings rose by 117% to $16.2bn in 2017, lifting earnings per share to $1.92.

Cash generation was equally impressive. Free cash flow for the year rose from -$10.3bn to +$27.6bn, comfortably covering the $15.6bn paid out in dividends, and allowing for an $8bn reduction in net debt.

It just gets better...

Since reading Shell's 2017 results at the start of February, analysts' consensus profit forecasts for 2018 have risen by an average of $1.34bn. Earnings per share are expected to rise by 22% to $2.35 this year, improving the level of dividend cover to 1.25 times.

Although this level of cover is somewhat lower than I'd normally want to see, improved conditions in the oil market mean that Shell's dividend plans look very affordable to me. For investors looking for a pure income stock, I believe Shell deserves a 'buy' rating.

5 dividends I'd retire on

The beauty of dividend income is that it can be reinvested until you need it, when it will provide a cash income without requiring any trading activities.

In my view, this is a powerful way to build a stock portfolio to help fund your retirement. To help you get started, the Motley Fool's dividend gurus have chosen five dividend stocks they rate as top income buys.

Full details of all five shares are provided in 5 Shares To Retire On. This report is free and without obligation. To download your copy, click here now.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.