Contrarian Opportunities in Dividend Stocks: Why Coca-Cola and PepsiCo Are Buy-and-Hold Gems in a Discounted Sector

In an era where growth stocks dominate headlines and AI-driven sectors capture investor imagination, the consumer staples sector has quietly become a haven for strategic value investors. With a forward price-to-earnings (P/E) ratio of 20 times and a dividend yield of 2.7%-significantly higher than the S&P 500's 0.7%-the sector offers a compelling contrast to the speculative fervor of the broader market according to Forbes. While the Consumer Staples Select Sector SPDR Fund (XLP) underperformed the S&P 500 by 16.2 percentage points in 2025, its resilience in 2024 and projected normalization in 2025 suggest undervaluation rather than obsolescence. For investors seeking long-term stability and income, Coca-Cola (KO) and PepsiCo (PEP) stand out as two of the most compelling buy-and-hold opportunities in this discounted sector.

The Case for Strategic Value Investing in Consumer Staples

The consumer staples sector's appeal lies in its defensive characteristics. Even as it lagged the S&P 500 by 2.4% in Q3 2025, the sector demonstrated its role as a safe harbor during market volatility. This resilience is underpinned by stable consumer demand for essential goods, strong balance sheets, and a Federal Reserve policy environment that remains supportive of low-yield environments. Analysts at Charles Schwab note that the sector is poised to outperform in a weak-growth scenario, a historical pattern that aligns with its current valuation metrics.

Coca-Cola and PepsiCo, as global beverage titans, exemplify the sector's potential. Both companies have maintained uninterrupted dividend growth for decades, a testament to their operational discipline and financial strength. However, their distinct strategies and financial profiles offer unique advantages for value investors.

PepsiCo: A Dividend Powerhouse with Strategic Agility

PepsiCo's 2025 forward dividend yield of 4% makes it one of the most attractive income stocks in the sector. This outpaces Coca-Cola's 2.9% yield and reflects PepsiCo's aggressive cost management and productivity initiatives, which have offset rising supply chain costs. The company's diversified business model-combining beverages with a robust snacks portfolio-provides a buffer against sector-specific headwinds. In Q3 2025, PepsiCo's international beverage business grew by 6% organically, while its non-sugar variants gained market share in key regions like the U.K. according to Yahoo Finance.

Financially, PepsiCo trades at a forward P/E of 21.8, lower than Coca-Cola's 25.24, suggesting it is more undervalued relative to earnings. However, its debt-to-equity ratio of 2.49 raises questions about leverage compared to Coca-Cola's 1.84 according to Artificall. Despite this, PepsiCo's free cash flow of $7.19 billion in 2025-though down 9.28% year-over-year-supports its dividend payments comfortably, with only 36% of operating cash flow allocated to dividends according to Monexa. This flexibility positions PepsiCo to sustain its 49% dividend growth since 2020, outpacing inflation and offering a compelling margin of safety for long-term investors.

Coca-Cola: A Conservative Titan with Global Reach

Coca-Cola's pure-play beverage focus and unmatched global distribution network reinforce its market leadership. In Q3 2025, the company delivered 6% organic revenue growth, expanding margins despite currency headwinds. Its portfolio of 30 billion-dollar brands, spanning sparkling drinks, hydration, and coffee, ensures broad consumer appeal. While its forward P/E of 25.24 is higher than PepsiCo's, this premium reflects Coca-Cola's strong brand equity and long-term growth potential according to Artificall.

Financially, Coca-Cola's conservative capital strategy shines. With a debt-to-equity ratio of 16% and a cash-to-assets ratio of 14%, it maintains a stronger balance sheet than PepsiCo according to Nasdaq. Its dividend payout ratio of 71%-compared to PepsiCo's 100%-provides a buffer for future reinvestment and dividend growth according to The Fool. Although its dividend has grown by 24.4% since 2020, slightly lagging behind inflation, Coca-Cola's free cash flow of $3.65 billion in the first nine months of 2025 underscores its ability to sustain payouts according to The Fool. For investors prioritizing financial stability over aggressive yield, Coca-Cola offers a safer, albeit slower, path to compounding.

Contrarian Logic: Why Now Is the Time to Buy

The consumer staples sector's underperformance in 2025-driven by investor rotation into growth stocks-has created a buying opportunity for patient investors. With the sector trading at a discount to the S&P 500 and facing only a projected 3.2% earnings decline in Q3 2025, the margin of safety is significant. Both Coca-Cola and PepsiCo have demonstrated resilience in navigating pricing pressures and shifting consumer preferences, making them ideal candidates for a buy-and-hold strategy.

Moreover, the sector's historical tendency to outperform during economic slowdowns adds a layer of strategic value. As Schwab analysts note, consumer staples are likely to shine if growth fails to meet expectations-a scenario increasingly plausible in a post-peak inflation environment according to Schwab. By investing in these dividend kings now, investors can capitalize on their discounted valuations while securing a steady income stream and long-term capital appreciation.

Conclusion

In a market obsessed with the next big thing, Coca-Cola and PepsiCo remind us of the enduring power of simplicity and consistency. Their robust financials, disciplined capital allocation, and ability to adapt to changing consumer trends make them standout choices for strategic value investors. While PepsiCo's higher yield and lower valuation offer immediate income appeal, Coca-Cola's conservative balance sheet and global brand strength provide long-term stability. Together, they represent a rare combination of defensive qualities and dividend resilience-a perfect storm for contrarian investors seeking to build a portfolio that thrives in both bull and bear markets.