Why do I keep investing in this FTSE 100 stock?

Should I continue to invest FTSE 100 stock Diageo (LSE: DGE)? Yes, I like a lot of quality stocks in my Stocks and Shares ISA. However, I also like income stocks for yield through dividend reinvestment, and also growth stocks for reasonable capital gains. However, I always watch out for low volatility and defensive stocks as well. Diageo does it all

Next dividend payment on Diageo shares

Diageo’s forward dividend yield of 2.32% is lower than the FTSE 100 average of 3.7%. But their track record is exemplary. Diageo has paid increasing dividends over the past 10 years. Analysts have increased dividends again for 2023 and 2024. Diageo is a Dividend Aristocrat stock.

Dividend growth has consistently been in the mid-digits or higher, except for pandemic years. And future shareholder payouts also look safe, as coverage is based on analyst consensus estimates of more than two for 2023 and 2024.

Focus on quality growth

Diageo’s share price has risen 447% in 20 years from 650p to 3,557p today. That’s about 9% in capital per year on average previous returns from added dividends. The company’s financials also follow the same trend, which tells us that the stock price growth is justified.

In 2003 Diageo reported profits of £8.21bn. A decade later they were £11.3bn. Analysts expect a profit of £17.3bn for 2023. Yes, there have been blips, and periods of slow growth on the way, especially in 2020 and 2021, but the trend is very broad. And this is a quality business: the operating margin has been consistently around 28% for the last half decade, and the return on equity has increased from 26% in 2018 to 44% in 2022.

FTSE 100 defense stocks

The FTSE 100 stocks with the lowest daily volatility are Reckitt at 1.55% (which I have). Diageo is in ninth place with 1.87%. All of the companies in the top 10 are consumer defense or utilities, save for one oddity in form Rest—consumer cycle, which I also have. These types of companies all share the feature of selling things that consumers need or don’t like to ease their good or hard times. Therefore, profits, and usually earnings, tend to be stable throughout the economic cycle and usually help reduce stock price volatility.

But Diageo is not a perfect stock. It is currently priced at a forward P/E ratio of 20.5, which is high for the industry and when compared to the broader market. Considering next year’s projected EPS growth of 6.7%, it doesn’t look like growth in a reasonably priced stock, based on a PEG ratio of nearly three. However, this is something I will continue to invest in. If I was only interested in growth, maybe I would have avoided it. But as I said, Diageo also offers income and other qualities that continue to justify its inclusion in my portfolio.