The 2 Best Dividend Stocks in the Candy Industry (and 1 to Avoid)

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CHOCOLATE!!!

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Okay, now that I have your attention, let's talk about something even sweeter than a nice, rich piece of candy. I'm talking about a nice, rich dividend yield from a candy company. Unfortunately for investors, the stock market doesn't offer a lot of options for putting your money where your sweet tooth is.

But there are still some tasty dividends in the sector. Two come from solid companies you almost certainly know, but the biggest yield is from a company you may never have heard of. So let's look at The Hershey Company (NYSE: HSY)Nestle (NASDAQOTH: NSRGY), and Rocky Mountain Chocolate Factory (NASDAQ: RMCF).

Hershey

I grew up on Hershey candy bars (and on riding roller coasters at Hersheypark in Hershey, Pennsylvania every summer). So it was one of my first investments as an adult, and luckily for me, it's just as sweet as ever.

The name Hershey is synonymous with chocolate, and after divesting its pasta (!) holdings in 1999, it has focused almost exclusively on chocolate and candy. The company owns not only its flagship Hershey's brands, as well as the brands of longtime holding Reese's, but has recently purchased high-end West Coast chocolatiers Scharffen Berger and Dagoba. It branched out into the hot dried-meat snack industry in 2015 with its purchase of Krave Jerky.

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The stock has also been an outperformer, up more than 13% over the past year, and handily beating the S&P 500 over the last 10 years. Its current dividend yield is a not-too-shabby 2.2%. The company has increased its dividend almost every year for the past 20 years -- the lone exception was 2009, when it held it flat during the Great Recession -- which is an impressive streak, and the best in the industry.

With solid performance, a great brand, and an impressive dividend history, Hershey's is an excellent choice for any dividend-focused investor. (But sorry to all you Snickers fans: Hershey's big U.S. rival, Mars, Inc., is a privately held company in which you can't invest.)

Nestle

Although it's much more diversified than Hershey, Swiss conglomerate Nestle still derives 10% of its revenue from candy. Its KitKat is the world's third-largest chocolate brand (although in the U.S., it's manufactured by Hershey). But a higher percentage of the company's revenue comes from beverages (like Nescafe and Nestea), prepared foods (Stouffer's and Lean Cuisine), and even pet food (Purina). Investing in Nestle invests you a little bit in candy, but a lot more in other sectors.

There are some other things to be aware of when contemplating a Nestle investment. Because it's a Swiss company that isn't traded on a major U.S. exchange, shares are only available to Americans through the pink sheets. That may not appeal to some investors. Also, because the company does its accounting in Swiss francs, the dividend payout in U.S. dollars may decrease from quarter to quarter, despite the company's 20-plus-year history of annual dividend increases.

Still, the company currently yields about 2.7%, higher than Hershey, so a dividend investor may want to look past these hurdles and jump in.

Rocky Mountain Chocolate Factory

I don't blame you if you've never heard of this company before. It's far smaller than either Hershey or Nestle, with a market cap of just $69 million -- compared to $23.4 billion for Hershey and $262 billion for Nestle. But dividend investors may be tempted by its eye-popping yield of 4.1%. That handily beats out popular confectioner Tootsie Roll (NYSE: TR) and Cadbury-owning conglomerate Mondelez International (NASDAQ: MDLZ), with 1% and 1.6% yields, respectively. Dividend investors will also be pleased that Rocky Mountain has gradually been increasing its dividend over the past decade -- not every year, but every few years.

The company's model is radically different from the other companies on this list. It's similar to Berkshire Hathaway's See's Candies in that it operates an online store and also sells directly through mall kiosks and other locations. Unlike See's Candies, though, Rocky Mountain franchises its stores, while See's owns and operates its own locations. But don't let that big yield fool you: This company has some serious issues. 

First of all, the company's small size should be a huge warning flag to investors. Small companies like this one can be very volatile and risky, and a dividend investor is often looking for more stability in his or her portfolio.

In fact, just last year, Rocky Mountain encountered an unexpected situation when U-Swirl -- a company to which Rocky Mountain had sold a frozen-yogurt franchise in 2014 -- defaulted on its loan agreement. One thing led to another, and now Rocky Mountain owns U-Swirl in its entirety. In its 2016 Annual Report, Rocky Mountain noted that U-Swirl "has a history of losses and may continue to report losses in the future."

Investor takeaway

If you're a dividend investor with a sweet tooth, Hershey and Nestle are the top dividend stocks in the candy industry. But investors should keep one thing in mind: It's not a very big field to choose from. Dividend investors looking for yields of 5% or more simply need to look elsewhere.

In fact, the industry's top yielder, Rocky Mountain Chocolate Factory, despite a decent balance sheet, has suddenly found itself in possession of a subsidiary it doesn't want. While it's possible the stock might outperform in coming years, there are better yields in other sectors for much lower risk.

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John Bromels owns shares of Berkshire Hathaway (B shares) and The Hershey Company. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Nestle. The Motley Fool has a disclosure policy.