In a market where few things are certain, it’s nice to be able to ‘set it and forget it’ with a Dividend King like Pepsi that increases its dividend payout like clockwork every year.

There is some concern among investors that consumer demand for carbonated soft drinks will fall in developed markets like the United States, but Pepsi is fairly well-positioned for this risk. Carbonated soft drinks have plenty of runway for growth in international and emerging markets. Plus, Pepsi’s brand portfolio features plenty of beverage options for developed-market consumers looking for healthier beverages, like Bubly sparkling water, Pure Leaf iced tea, and Tazo tea. 

Lastly, it’s important to remember that there is much more to Pepsi than just beverages — it is also the number one player in the lucrative savory snacks market, worth over $250 billion annually, with leading brands like Doritos, Cheeto’s, Lay’s, Fritos, and Ruffles all in its arsenal.

Late last year, the company also announced a deal to acquire the 50% of Sabra (best known for its hummus as well as other dips and spreads) that it didn’t already own, as well as a $1.2 billion deal for tortilla chip maker Siete, illustrating that the company has its sights set on long-term growth in this area.

Another nice thing about Pepsi is that it is a consumer staples company making products that enjoy durable demand from consumers. Even in a challenging macroeconomic environment, most customers who enjoy Pepsi or Diet Pepsi will continue to pick it up on their weekly grocery trips. In an inflationary environment, consumers may be forced to delay or forgo bigger ticket purchases, but a six-pack or case of Pepsi or Diet Pepsi still represents just a small percentage of their budget that they are unlikely to cut.

The same can be said about the aforementioned savory and salty snacks that Pepsi sells or staples like Quaker Oats oatmeal.

Turning to Wall Street, analysts have a Moderate Buy consensus rating on PEP stock based on four Buys, three Holds, and zero Sells assigned in the past three months, as indicated by the graphic below. After a 9% decline in its share price over the past year, the average PEP price target of $167.86 per share implies 13.6% upside potential.

See more PEP analyst ratings

I’m bullish on Pepsi based on its attractive, above-average 3.7% dividend yield and its long and proud history of growing its dividend payout for over five decades. In a market that runs hot and cold and where trends can be fleeting, this type of long-term reliability is something to celebrate.

I’m also constructive on Pepsi stock based on its below-average valuation–which should give investors decent downside protection and plenty of exposure to the upside–and its strong business of selling consumer staples with durable demand. This gives the stock a strong defensive backbone.

Disclosure

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Diversify With Small-Cap and International ETFs

Many Redditors have suggested the investor diversify beyond VOO by allocating a portion of his portfolio to small-cap value funds and international ETFs.

A few commenters mentioned funds like AVUV or VIOV because they target smaller, undervalued companies that, if invested in, can offer high growth over time.

“VIOV or AVUV (small-cap value – considered a compensated risk – I have 15% here myself),” a commenter suggests.

Some Redditors recommended certain funds like VXUS or VWO for U.S. international and emerging markets exposure.

“Small allocation to VXUS as well for international diversification,” a comment reads.

“You already have U.S. large caps covered. So what you’re looking for is either mid/small caps to cover the rest of the U.S. market and/or international,” another comment suggests.

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Stick With VOO and Complement it With High-Risk Bets

Many Redditors in the thread mentioned that the VOO core is as solid as possible but can be supplemented with a couple of high-risk, high-reward ETFs.

“QQQM or VUG or SCHG (large-cap growth – considered an uncompensated risk because it further concentrates rather than diversifies away from high growth holdings in VOO – but I have 15% here myself),” says a commenter.

Another Reddit member suggested a small allocation to a Bitcoin-related ETF.

“Grab FBTC for 5% or another bitcoin ETF. Roll with it for a few decades,” he said.

A commenter who seems risk-tolerant shared his allocation, implying that investing in high-risk, high-reward ETFs is a good strategy.

“I’m 42 and basically my only positions are IVV and VGT/IYW. My risk tolerance is 11/10 and I ain’t changing,” the Redditor wrote.

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More importantly, this solid demand is translating into outstanding growth for Ambarella. Its revenue in the third quarter of fiscal 2025 (which ended on Oct. 31, 2024) increased an impressive 63% year over year to $82.7 million. The chipmaker also swung to an adjusted profit of $0.11 per share from a loss of $0.28 per share in the year-ago period.

Ambarella’s fiscal Q4 guidance of $78 million would translate into a 51% increase in its revenue from the year-ago quarter. The company is on track to finish fiscal 2025 with total revenue of $279 million, which would be a 23% improvement from the previous fiscal year. Its loss is expected to shrink to $0.30 per share from $0.83 per share in fiscal 2024.

As the following chart shows, Ambarella’s top and bottom lines are on track to improve further over the next couple of fiscal years, with the company expected to report an adjusted profit per share in fiscal 2027.

The overall AI computer vision market is set for impressive growth over the next three years, so it won’t be surprising to see Ambarella deliver the healthy growth that Wall Street is expecting from it. The company could be able to sustain its positive momentum for a longer period as well since it claims to have an automotive revenue pipeline of $2.2 billion through fiscal year 2031.

If you throw in the prospects of AI computer vision processors in other areas such as consumer cameras and security applications, Ambarella may have enough room to grow its business significantly in the long run.

The growing demand for high-speed data transmission in AI servers is driving robust growth in the networking equipment market. According to Morningstar, the spending on generative AI networking equipment could increase at an annual rate of 34% between 2023 and 2028, generating $34 billion in annual revenue at the end of the forecast period.

Lumentum Holdings is already benefiting from this trend, witnessing a nice turnaround in its financial performance last quarter. The company’s revenue in the first quarter of fiscal 2025 (which ended on Sept. 28, 2024) increased 6% year over year to $337 million. While that may not seem very impressive at first, investors should note that Lumentum’s top line was down 23% in fiscal 2024 owing to soft demand from the cloud and networking and industrial segments.

However, things have started changing for the better thanks to AI. Its cloud and networking revenue jumped 23% year over year in fiscal Q1 2025, offsetting the weakness in the industrial business. With cloud and networking now producing nearly 84% of Lumentum’s top line, this business is set to drive stronger growth for the company.

Lumentum points out that its cloud customer base is growing with the addition of new hyperscale customers that are placing orders for its lasers that are used in fiber-optic cables to enable high-speed data transmission in AI servers. What’s more, Lumentum is busy expanding its manufacturing capacity so that it can fulfill more orders.

These favorable developments explain why Lumentum’s revenue estimate of $390 million for the current quarter would again be an improvement of 6% over the prior year. Even better, analysts are expecting the company’s growth rate to improve as the year progresses. Consensus estimates are projecting a 17% jump in Lumentum’s revenue for fiscal 2025 to $1.59 billion, which is expected to be followed by even stronger growth in the next fiscal year.

The robust top-line growth is expected to filter down to the bottom line, with Lumentum’s earnings expected to jump by 56% in the current fiscal year to $1.58 per share followed by healthy growth in the next couple of years as well.

It won’t be surprising to see the market rewarding this tech stock with more upside thanks to its improving earnings power. That’s why it isn’t too late for investors to buy Lumentum Holdings as its cloud and networking business seems set for better times ahead thanks to AI.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Lumentum. The Motley Fool has a disclosure policy.

These 2 Artificial Intelligence (AI) Stocks Are Outpacing Nvidia’s, and They Can Still Soar Higher was originally published by The Motley Fool