2 Dividend Stocks Down 12% in 2026 to Buy in October and Never Sell

PepsiCo and Hershey shares are each down roughly 12.5% year-to-date as of Oct. 1, 2026, lifting forward dividend yields to 4.63% and 3.65%, respectively. PepsiCo raised its dividend 4%, posted record trailing-12-month free cash flow of $9.2B, and returned 84% of that cash flow through dividends as food and beverage volumes rose 3% and 2%. Hershey, recovering from elevated cocoa costs, expects 2026 organic sales growth of 3%-3.5% and adjusted EPS growth of 32.5%-35%, supported by $2.1B of trailing-12-month free cash flow and a 52% dividend payout ratio.

Analysis

PEP's volume recovery is more strategically important than the cash-return narrative: it suggests price elasticity has finally forced a reset in promotional architecture and pack-price strategy. The near-term cost is lower realized pricing and potential gross-margin dilution, but sustained volume/share gains would improve fixed-cost absorption and restore earnings-quality credibility over the next 2-4 quarters. The key question is whether this is an idiosyncratic execution gain or an industry-wide return to promotion; the latter would pressure KO, KDP and snack peers through a more competitive shelf-price environment.

HSY's earnings rebound is highly levered to cocoa normalization rather than purely operating improvement. Automation and capacity spending can protect margins over 6-18 months, but additional capacity also raises operating leverage if U.S. confectionery demand weakens or private-label/value alternatives gain traction. Watch cocoa futures and HSY's gross-margin guidance rather than FCF payout ratios: a renewed cocoa spike would quickly consume the apparent earnings recovery and make the current multiple less defensive than staples investors assume.

Consensus may be treating both drawdowns as equivalent "quality dividend" opportunities, despite materially different risk profiles. PEP offers diversified geographic, category and input-cost exposure, making it the cleaner defensive rerating candidate if rates fall; HSY is a concentrated soft-commodity and discretionary-treat exposure whose earnings estimate dispersion should remain elevated. Neither dividend yield alone establishes value if volume stabilization requires structurally higher trade spending.

Key Decisions for Investors

• Initiate a 3-6 month long PEP / short HSY pair, sized market-neutral: PEP has more credible volume-led multiple support while HSY remains vulnerable to cocoa-driven estimate revisions. Target 8-12% relative return; exit if PEP's North America beverage/food volumes revert negative for two consecutive quarters or HSY reaffirms margin expansion despite elevated cocoa.
• Add PEP only on confirmation of a second consecutive quarter of positive organic volume with stable or improving gross margin; a 4-6% dividend yield provides carry while waiting. The principal risk is a broad staples de-rating from higher real yields, not a dividend sustainability issue.
• For HSY, remain on watch rather than buy the drawdown. Consider selling limited-risk put spreads around the next earnings report only if cocoa futures reaccelerate and consensus EPS remains unchanged; the catalyst is a gross-margin or pricing-guidance reset, with risk capped by a rapid commodity reversal.
• Monitor KO and KDP for promotional-spend commentary as a read-through to PEP: broad beverage discounting would weaken the thesis by converting PEP's volume recovery into a margin-share trade rather than a sustainable demand recovery.