Are you looking to spice up your portfolio with some dividends? If you're not, think again. There are very good reasons to love dividend stocks, including the income stream they provide investors, the fact that these income streams often grow over time, and the additional possibility of principal appreciation.
But finding the right dividend stocks isn't always easy. After all, a high dividend yield doesn't automatically translate into an excellent dividend stock. To make things easier, here are two income-investment ideas for you to consider: McDonald's (MCD -0.05%) and Apple (AAPL 1.27%).
Image source: McDonald's.
Profiting from fast food
McDonald's fits the definition of a solid dividend stock, and it's just about as good as any other company in the stock market. Not only does the fast-food company boast a meaningful 3.1% dividend yield -- well over the average dividend yield of companies in the S&P 500 (about 2.1%) -- but the company also boasts an incredible dividend track record. McDonald's has increased its dividend each and every year since paying its first one in 1976 -- a whopping 40 years ago.
During the past five years, McDonald's has impressively increased its dividend by about 9% annually. And the company recently sustained its long track record of dividend increases when it announced in May that it was boosting its quarterly dividend from $0.85 to $0.89.
Recently, McDonald's business hasn't been growing very rapidly. With EPS only averaging about 1% annualized growth during the last five years, McDonald's still has room for more dividend increases. The company is currently paying out just 66.4% of its earnings in dividends -- not a bad payout ratio for a company with a 3.1% dividend yield.
Tapping into tech's biggest cash cow
Apple's dividend yield of 2.1% isn't as impressive as McDonald's 3.1% yield, but Apple's dividend has far more growth potential than the fast-food chain. This is evident by looking at Apple's recent trends in dividend increases. Since Apple reinitiated a dividend in 2012, it has averaged an annual increase of 11.7%. But the growth potential looks even better when considering Apple's very low payout ratio. Apple is currently only paying out 25% of its annual earnings in dividends, leaving huge room for further increases.
Image source: The Motley Fool.
For investors looking for something close to a guarantee for more increases in the future, Apple management has specifically noted several times that it plans to continue increasing its dividend on an annual basis for years to come. Overall, Apple may not shine when it comes to dividend yield, but it more than makes up for its lack of yield with dividend growth potential.
Both Apple and McDonald's are great dividend stocks to consider for investors who are looking for their investments to pay them on a quarterly basis. Personally, I think that these are two of my favorite income investments in the stock market right now. Not only do their dividends look set to pay shareholders a healthy stream of cash over the next 10 years, but the stocks themselves are arguably trading at reasonable valuations.
McDonald's and Apple have price-to-earnings ratios of 22 and 12.5, respectively. While McDonald's price-to-earnings ratio of 22 may seem high at first glance, investors should consider the sustainability of a fast-food chain with such a powerful brand: McDonald's cheeseburgers are here to stay. A sustainable, consistently profitable business comes at a price -- and 22 times earnings isn't bad.
