Look for proven companies that sell products and provide services that will always be in demand. One well-known name comes to mind.
Anyone currently on the hunt for dividend stocks is facing a bit of a problem. That is, most of the best ones are at or near all-time highs. Now’s not the optimal time to step in — particularly if you’re planning on stepping in forever.
A handful of high-quality S&P 500 (^GSPC 0.12%) dividend stocks have bucked this bigger trend, though, instead peeling back to more palatable prices.
One of the top prospects among these names is fast-food chain McDonald’s (MCD -0.41%). Shares are only down around 10% from their January peak. However, that may be about as much of a discount as you’re going to see from this ticker anytime soon.
The rest of the McDonald’s story
You know the company. McDonald’s is, of course, the planet’s biggest restaurant chain, operating a little over 42,000 locations worldwide. Last year, it did nearly $25 billion worth of business, turning $8.5 billion of that into net income. However, McDonald’s isn’t quite the company you might think it is.
Customers neither know nor care, but the company itself doesn’t actually own most of its restaurants. Nearly 95% of its locations are run by franchisees, who, for most intents and purposes, are in business for themselves, even if not in business by themselves.
As is the case with most franchisor/franchisee relationships, McDonald’s operators are required to purchase their supplies from the parent and must adhere to the parent’s operating standards. They also pay the parent a portion of their total sales. None of its owners/operators mind this too much, though, since the McDonald’s brand is a reliably marketable one.
There is one stark difference between the McDonald’s franchising agreement and the franchising agreement most other restaurant chains make with their operators, though. That is, these franchisees don’t own the land or the building they run their business from. The McDonald’s Corporation itself owns it, and charges franchisees rent based on ever-rising prevailing rates. In fact, nearly 40% of its top line reflects rent collected from operators, making it the company’s single-biggest source of revenue.
A business model with built-in growth
No, franchisees don’t particularly love the arrangement. Like any other real estate purchase, building up equity in the property and the structure sitting on it is usually one of the benefits of opening any restaurant. McDonald’s franchisees don’t get to enjoy this benefit.
By and large, though, these franchisees understand and accept the trade-off even if they don’t like it. McDonald’s isn’t just the world’s biggest restaurant chain, after all. It’s also one of the world’s most recognized names, while its golden arches are one of its most recognizable logos. The odds of profitable success are much higher with a McDonald’s restaurant than they are with other fast-food chains.
Numbers crunched by Barron’s suggest that the average McDonald’s located in the U.S. does nearly $4 million worth of business per year, which is roughly twice that of the typical Wendy’s or Burger King.
The real winners of the agreement, however, are McDonald’s investors — and, in particular, its dividend-minded shareholders. Just like your own mortgage or rent payments, McDonald’s expects to collect its monthly rent payments regardless of the economic backdrop. And, unlike your monthly payment, for anyone with a mortgage, these monthly bills are ratcheted higher on a regular basis.
Meanwhile, not only are rising supply costs translating into more revenue for the parent company, but McDonald’s has recently raised its royalty rate from 4% to 5% for new operators.What stinks for operators is good news for shareholders, however, as it generates the income that supports McDonald’s growing dividend.
To this end, the fast-food giant has now upped its annualized dividend payment for 47 years in a row, with the most recent increase being a 10% improvement on its quarterly payment. You can plug into this long string of success while the stock is yielding right around 2.5%.
A dividend that’s built to last
Is it possible something could derail McDonald’s dividend track record? Sure. Anything’s possible. The company might eventually run out of places to set up new stores, for instance, putting all of its income-growth pressure on its existing locales. Franchisees might eventually push back hard enough to crimp profit growth as well. Never say never.
At the same time, though, be realistic. Consumers are always going to eat, and they’re always going to seek out value and convenience. McDonald’s offers both. It’s also an iconic go-to brand. Consumers are passing their nostalgic preference for this fast-food chain’s food down to their children, who will very likely do the same for their kids.
It’s also worth adding that only about 60% of the company’s profits are currently consumed by dividend payouts. That leaves McDonald’s plenty of fiscal wiggle room to sustain its dividend payments should it ever need to pause and regroup, as was the case during the COVID-19 pandemic.