Are Lower Interest Rates to Blame for Knocking Dividend Kings Coca-Cola and Procter & Gamble Off Their All-Time Highs?

Coca-Cola (KO 0.55%) and Procter & Gamble (PG 0.20%) are two of the most reliable dividend stocks on the market. Both companies are Dividend Kings -- which are companies that have paid and raised their dividends for at least 50 years in a row (Coke and P&G have done it for more than 60 consecutive years).

Coke and P&G are also components of the Dow Jones Industrial Average -- which contains 30 industry-leading blue chip companies. And, perhaps most importantly, both companies can thrive no matter the economic cycle thanks to their steady and predicable business models.

Coke reached an all-time intraday high on Sept. 4, while P&G achieved its record intraday high on Sept. 10. And yet, as the broader indexes have continued to rally in recent weeks, Coke and P&G have sold off slightly from their highs.

Here's what lower interest rates mean for Coke and P&G, and whether these dividend stocks are worth buying now.

Characteristics of safe stocks

The Consumer Staples Select Sector SPDR Fund, which mirrors the performance of the sector, is up 17.4% year to date -- led by gains in its largest components like Coke and P&G. That's a huge return from a historically stodgy and low-growth sector. However, investors tend to gravitate toward areas of safety amid market uncertainty -- which has been the case during this period of inflation and higher interest rates.

Consumer staples, healthcare, and utilities are some of the safest stock market sectors. Demand for the products and services in these sectors tends to be less correlated to the broader economy than, say, industrials or consumer discretionary, which can be highly cyclical. This characteristic is a strength when economic growth stalls or there is uncertainty. But it can also be a weakness when economic growth is strong and helps compound gains in other sectors.

It wasn't long ago that the top-performing Vanguard exchange-traded fund (ETF) in 2024 was the Vanguard Utility ETF. So, it's worth understanding that 2024 has been a breakout year for safe sectors. Given the run-up, short-term-minded investors may choose to rotate out of staples and utilities and into more cyclical names. But trading in and out of sectors based on market dynamics can be a flawed long-term strategy. A far simpler approach is to find the highest-quality companies in a sector and stick with them or even add to them over time. Coke and P&G have demonstrated why they are arguably two of the best companies in the consumer staples sector.

Runways for future growth

Although Coke and P&G operate in completely different industries, they are remarkably similar in that they are highly focused capital allocators.

Coke has a diversified beverage portfolio that spans soft drinks, juice, water, sparkling water, energy drinks, coffee, and tea. When it acquires a brand, it puts the full force of its marketing and distribution prowess behind it -- which can propel a regional winner to the global stage. This is exactly what Coke did with Topo Chico.

Similarly, P&G focuses on its top brands in several consumer goods categories -- from Tide detergent to Gillette razors to Pampers diapers and more. P&G rarely acquires or develops an entirely new brand. Instead, it develops existing brands and delivers for loyal customers. P&G's simple yet effective strategy gives it pricing power -- which supports earnings growth, stock buybacks, and consistent dividend raises.

Two buy-and-hold candidates no matter what the market throws at you

Coke has a 29 price-to-earnings (P/E) ratio and a 2.7% yield compared to a 28.7 P/E ratio and a 2.3% yield for P&G. So neither stock is cheap or has an ultra-high yield.

Given their higher valuations and recent performances, both companies are admittedly vulnerable to a pullback. But long-term investors should care more about how each company is doing and how it is positioned for future growth than whether it is falling in or out of favor in the short term.

P&G continues to use buybacks and dividends to reward shareholders, while Coke is accelerating growth thanks to technological improvements and better brand integration across its supply chain.

Both companies are at the top of their game and remain solid buys now, but investors shouldn't be surprised if either stock sells off further due to valuation concerns or some folks choosing to dump safe stocks in favor of risker names.