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I’m not a fan of fast food. And since my wife is a strict vegetarian, I don’t eat very many hamburgers, even of the slow-cooked variety.
So you’d think McDonald’s would be way off my radar, right?
Wrong. My mouth starts watering whenever I pass those golden arches. Here’s why …
McDonald’s Serves Up Big, Fat, Juicy Dividends
And Will Gladly Supersize Your Income
In last week’s column, I told you that more and more companies are cutting dividends. And I pointed out that despite the bleak landscape, there are still some places to find rising payments.
McDonald’s is a perfect example of a company boosting its dividend in the face of economic weakness.
In 2007, it decided to boost its annual payment by a whopping 50%. Then, just last month, it decided to increase its dividend another 33%!
As I constantly point out, that means investors holding these shares keep getting higher and higher effective yields on their original purchase price.
In this case, I have a real world example:
I first recommended McDonald’s as a total return play to my Dividend Superstars subscribers on November 26, 2007. At the time, the shares were yielding about 2.6%.
Today, less than a year later, those same shares are already producing an effective yield of 3.5%.
In other words, that single 33% dividend hike has already added another percentage point to the stock’s effective annual yield!
Plus, since my initial recommendation through yesterday’s close, MCD shares had posted a small capital gain, while the S&P 500 lost more than 31%!
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| That’s what investors are saying about McDonald’s recent 33% dividend hike! |
And just to bring the point home, let’s go back a little further into McDonald’s history, before the latest two dividend hikes, to see what kind of results a long-time investor would have gotten:
Pretend it’s March 26, 1990. You just finished polishing off a Big Mac at the local McDonald’s. Across the restaurant’s floor, you see a long line of customers in front of the register, wallets and purses in hand.
You go home and call your broker. “Buy me 100 shares of McDonald’s,” you say. That day, the stock closes at about $29 a share. Its indicated dividend is $0.31, making the stock’s yield slightly more than 1%.
The move is certainly no great leap of faith. By 1990, McDonald’s restaurants are everywhere — it’s the fast food company by which all others are judged. Its stock is considered “boring.”
Now fast forward 16 years to March 27, 2006. McDonald’s stock closes at $34.55 a share. Its indicated dividend is $0.67 a share, giving the stock an annual yield of 1.9%. Hey, that’s twice as much as when you bought it, right?
Nope.
During your 16 years of ownership, McDonald’s stock split 2-for-1 on two occasions. Adjusting for these splits, your purchase price is equal to $6.20 a share.
Dividing the current indicated dividend of $0.67 a share by your $6.20 cost basis gives you a yield on cost of 10.8%. Plus, you’re also sitting on paper gains of 457%. That’s an average annual return of 28.6%. And, in addition, you got regular cash payments the whole time!
Will McDonald’s Dividend Drive-Through Stay Open?
As I mentioned, I have already recommended McDonald’s to my Dividend Superstars subscribers. And so far, they have been doing rather well with that position in spite of an absolutely horrible stock market.
The question is whether the good times will continue for McDonald’s. In my mind, the answer is “yes.”
All along, my pro-McDonald’s argument has been twofold:
First, while it’s technically a consumer discretionary company, MCD is really a consumer staple food stock these days.
After all, where else can financially squeezed people find complete meals for a few bucks? In many cases, eating at McDonald’s is far cheaper than buying similar ingredients and making a home-cooked meal.
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| I snapped this shot of Ronald McDonald in a Bangkok mall. He’s doing the traditional Thai wai. |
In the kind of recessionary environment we have now, that argues for stronger sales. People will flock to the lowest-cost sources of food, especially when they save time in the process.
Second, the company’s huge — and expanding — overseas presence will further insulate it from weakness in one region and provide plenty of future growth.
In the last two months, I’ve spent time on four different continents. And you know what I saw every place I visited? Lots and lots of Ronald McDonalds!
Just take a look at the company’s latest earnings results, which came out on October 23:
McDonald’s said profits rose to $1.05 a share from $0.89 a year earlier. That was better than analysts expected — the consensus estimate was $0.98 a share.
Meanwhile, the company’s revenues gained 6%, with global same-store sales gaining 7.1%.
I think those kind of results will continue to support the company’s generous dividend payments, and potentially produce mouth-watering returns for savvy investors.
Does that mean you should run out and buy the shares today? Only you can decide whether they belong in your portfolio.
And please note that I have given my Dividend Superstars subscribers an exit price at which to sell the shares to lock-in profits.
However, at the very least, I think McDonald’s is proof positive that there are solid brand-name stocks that are not only holding up very well in these tough economic times, but also handing their investors richer and richer payments.
Best wishes,
Nilus
P.S. McDonald’s is just one of many solid dividend-payers I’ve recommended to my subscribers. If you want to get an entire portfolio packed with steady income stocks, plus my sell-target for MCD, subscribe to Dividend Superstars now. You’ll get 12 issues for just $39. Plus, I’ll rush you a series of special reports that tell you all about my favorite income stocks. Click here for the details.
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