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Tickers in this Article: DPS, DEO, STZ, PEP, KO
When it comes to investing in beverage stocks, everyone already knows about the virtues of the world's two largest soft drink makers: Coca-Cola (NYSE:KO) and PepsiCo (NYSE: PEP). Steady earners, reliable dividend payers and owners of two of the world's most recognizable brands, the Coke and Pepsi stories have rewarded investors for decades. At least for the most part.

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But there's more to the beverage sector than just these two heavyweights. Normally, known for its defensive characteristics and protection afforded to investors during slumping markets, there are big names lurking in the beverage sector that some investors may be glossing over on their way to ordering up another round of Coke or Pepsi.

We're not knocking the big boys. They're fine investments in their own right, especially for long-term income investors. That being said, it often pays to look past the most familiar names to find some hidden gems in a stodgy sector like beverages. Let's take a look at some of the best opportunities that make the products that wet our pallets.

Lifting Spirits With Some Top Brands
(NYSE:DEO) Forward P/E: 12.9 Free Cash Flow: $1.43 billion
Diageo is the world's largest maker of spirits in the world, making glass-raising brands such as Johnnie Walker scotch, Ketel One vodka, Tanqueray gin and Captain Morgan rum. With familiar brands like these, Diageo's reach in the spirits world is almost on par with Coke and Pepsi in the soft drink arena. Investors may be a little disappointed with Diageo's share performance this year as its American depositary receipts (ADRs) are up less than 10% year-to-date. (Learn more in 20 Investments: American Depository Receipt (ADR).)

That hasn't stopped some international investors from seeing the potential in owning part of Diageo. In July, China Investment Corp. announced it purchased a 1% stake in the British beverage firm, which isn't surprising given how Diageo has recently expanded in the world's largest country.

Diageo is also a great way for investors to hedge against a fall in the U.S. dollar because 70% of the company's sales come from outside of the U.S. and some analysts think positive currency exchanges can help Diageo grow earnings by double digits annually for the foreseeable future. All this for less than 13 times forward earnings with a dividend yield of 2.6%. That's on par with U.S. treasuries and that makes Diageo a solid long-term bet.

Better Times In The Stars For Constellation?
Constellation Brands
(NYSE:STZ) Forward P/E: 7.9 Free Cash Flow: $378 million
Constellation Brands has its own impressive stable of brands with names such as Robert Mondavi wines, Corona and Modelo. That hasn't prevented the shares from being taken to task and while off their 2009 lows, shares of Constellation Brands are still down 10% year-to-date.

Constellation recently signed four major distribution agreements aimed at improving operating efficiency and bolstering sales. The company also shed its value spirits business in March, netting $334 million in proceeds and pared its workforce by 5% to lower costs. Constellation also seems to be lagging some of its competitors and its international presence, while strong, isn't on par with that of Diageo.

Constellation is a tough play at this point given that the economy hasn't fully recovered. In addition, the company doesn't pay a dividend and its free cash flow position of $378 million for fiscal 2009 is expected to decline in 2010. (High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing Dividend Yield For The Downturn.)

Just What The Doctor Ordered?
Dr. Pepper Snapple
(NYSE:DPS) Forward P/E: 12.4 Free Cash Flow: $1.8 billion
Dr. Pepper Snapple is no after-thought in the cola wars. Its flagship product has denizens of loyal drinkers and yes, the rumor about Dr. Pepper containing prune juice is false. Either way, Dr. Pepper Snapple shares have far outperformed Coke and Pepsi year-to-date, rising about 45% compared to 10% and 7% for Coke and Pepsi, respectively.

That performance apparently wasn't good enough to keep Dr. Pepper Snapple on the infamous Goldman Sachs Conviction Buy List, though Goldman still rates the shares "buy". Still, the stock is getting close to its 52-week high and if it can break through that level ($26.82), there might be more to come. The company said it intends to use some of its strong fee cash flow position to reduce by $400 million this year and that could be just what the doctor ordered for the balance sheet.

The Bottom Line: A Thirst For Better Returns
It wouldn't be a surprise to see Diageo shares start to run higher as the economy improves and more consumers start to upgrade to premium liquor brands. With a great suite of brands and a nice dividend yield, Diageo represents the best of the trio mentioned here. That being said, Dr. Pepper's earnings report on August 13 will be worth watching to see if the company can keep its recent momentum going. We'd stay on the sidelines concerning Constellation in the near-term.

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