This Stock's Still a Dividend Play for a Lifetime

A year ago, I highlighted McDonald's (NYSE: MCD) as the dividend play for a lifetime. Since then, the stock has climbed 29% (dividend-adjusted) -- vastly outperforming the S&P, by more than 25%. And the company boosted its payout by 11% in September last year. So with all that, is McDonald's still a buy?

In a word, yes!

To the future and beyond
Much remains the same about McDonald's from last year. It's still growing its massive chain of stores, still has its hidden assets, and still is cranking out great same-store sales, even in the midst of a dour economy. Here's how its comps -- sales growth at stores open for more than one year -- look over the last four quarters in comparison to peers:

The Golden Arches has put in a solid performance over the last year, even against fast-growing concepts like Chipotle (a McDonald's spinoff). With that type of performance from a mature company like McDonald's, investors have nothing to be ashamed of.

And McDonald's still has massive growth opportunities in front of it. The biggest, of course, is China. The company plans to bump up store count some 50% by 2013, to 2,000 outlets. Just 2,000 stores in a country of 1.3 billion? That's just one store for every 650,000 citizens. Compare that to the U.S., where the company supports a store with every 22,000 people. There's still a huge runway for growth in the Middle Kingdom.

Peers such as Starbucks and Yum! Brands (NYSE: YUM) are also targeting China for great growth, with Yum! envisioning 20,000 locations for its brands, against some 4,000 locations currently.

And then there's India, where McDonald's has only a few hundred locations in a population almost as large as China's. In fact, the company has said that it could support 50% or 60% sales growth on the subcontinent, if the infrastructure were as good as China's. There is also still plenty of opportunity in Latin America, where McDonald's licensee Arcos Dorados (NYSE: ARCO) is setting up restaurants.

Waiter, the dividend please...
All of those growth opportunities should provide the company ample room to raise its dividend. The stock currently yields 2.8% -- not huge, but it's growing very quickly.

Including last year's 11% bump, the dividend has soared 29% on average over the last five years. I expect another dividend boost next month.

The great thing about McDonald's dividend is that you can count on it growing year after year. The company pays out just 47% of its net income as dividends, leaving it plenty of room to raise the divvie. The company has also bought back $3.5 billion in stock over the past four quarters, returning all its free cash flow to shareholders and then some. Those actions are fulfilling the company's promise to return all free cash flow to shareholders as either repurchases or dividends, a commitment that the company recently reiterated in its annual report. All that has led our Income Investor newsletter to recommend the stock to subscribers.

McDonald's reliability on the dividend front is paramount. While I like mortgage REITs Annaly Capital (NYSE: NLY) and Chimera Investment (NYSE: CIM) right now because of their huge dividends, I have to keep a sharp eye on them. When macro-conditions change (e.g. interest rates go up), these companies will be hard-pressed to continue their gaudy dividends. Still, I like them now, because the conditions are still favorable. But for McDonald's, I don't have that concern. The company can keep pushing out great comps quarter after quarter and bumping that dividend year after year.

Check out McDonald's performance on a five-year stock chart and you'll be hard-pressed to find the latest market correction or even the financial crisis of 2008 and 2009. That type of low volatility is testament to the company's strength, making it a great retirement pick. At 18 times earnings, the stock is not immediately cheap, but such solid stocks rarely are, and as we've seen, McDonald's has the ability to outperform in tough times.

Foolish bottom line
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