Dividend stocks are some of the best investments you can choose to have in your portfolio. They provide investors with valuable stability that flows from their large sales footprints, established market share positions, and passive income streams.
This is an excellent time to be shopping in this market niche, too. That's because many dividend giants have fallen out of favor as Wall Street focuses on the small group of tech stocks that have powered most of the market's recent rally. As a result, you can get some fantastic dividend stocks at an attractive discount.
McDonald's (MCD -0.24%) is a great example of a stock worth considering after its recent slump. Sure, you'll have to compromise when it comes to weak short-term growth prospects. But that's a small price to pay for stellar long-term returns. Here's why this fast-food titan deserves a spot in your portfolio.
Not your average fast-food chain
McDonald's is one of those rare businesses that completely defies its industry. Restaurants are known for having a high failure rate and intense turnover as consumer tastes shift. But the fast-food giant has dominated the industry for decades.
The Big Mac is over 50 years old, for example. That iconic burger is just one of 17 classic menu items (including the Quarter Pounder and Chicken McNuggets) that generate over $1 billion of revenue each year. When it comes to size, staying power, and competitive strength, then, McDonald's is at the top of the industry.
That premium position is reflected in the chain's stellar profitability. Since McDonald's is heavily franchised (with over 90% of restaurants run by franchisees), it gets most of its earnings through high-margin rental, real estate, and franchise fees.
That's how it can generate over 40% profit margin compared to Chipotle's 17% rate. Management is aiming to push that profitability toward 50% of sales over the next few years as well.
The challenges
Investing is often about trade-offs, and there's a big one associated with McDonald's stock today. The chain has been seeing weaker sales trends in recent quarters in its core U.S. market, where customer traffic just dipped into negative territory. Peers like Starbucks are also seeing unusually weak traffic right now. But the slowdown raises concerns that McDonald's sales growth in 2024 and 2025 might be softer than investors have seen in the past several years.
McDonald's didn't get to its premium industry position without navigating through a few downturns. Look for the chain to ramp up its promotions as it heavily markets limited-time menu items. There's also room to cut prices without sacrificing its high profitability.
Dividend income
In the meantime, investors can sit back and collect one of the industry's most mouth-watering dividends. McDonald's paid out $4.5 billion of dividends last year, up from $4.2 billion. That translates to a payout ratio of just 52% of earnings, leaving room for many more boosts ahead.
As for dividend appreciation, management hiked the payout by 10% late last year, marking the 47th consecutive annual increase. Investors who buy the dividend stock today can feel confident about many more raises on the way, even if sales remain sluggish into late 2024.
Putting $1,000 into McDonald's stock right now would deliver about $24 in annual dividend cash to start. Expect that income stream to grow over time as the chain continues building up its earnings power.
