3 Great Dividend Stocks for the Beginning Investor

A generous dividend is all well and good, so long as the company sticks around long enough to keep paying it out, but in this economy that's not necessarily a given. In that spirit of realism let's look at three stocks with strong yields from companies that look like they're going to be around awhile.

Each of our three companies will be consumer-facing, so the business models will be easy to understand. Each will be a king of its market space that can make, market, and distribute its products with machine-like efficiency. And each will be a profit-making dynamo, producing goods that people around the world need to buy over and over.

Without further ado:

1. McDonald's (NYSE: MCD  )
Growing up, whenever I passed a McDonald's restaurant, I'd eagerly look to see how many millions or billions had been served. The company doesn't do that anymore, maybe because the number would seem absurd; it's probably surpassed the population of the planet by now, which helps make my point. After 71 years, this not-so-humble American hamburger joint is still serving countless Big Macs, shakes, and fries to people around the world. By the numbers:

  • We like to see dividend yields of around 3%. It's an arbitrary threshold, but one we feel separates the wheat from the chaff. At 2.8%, McDonald's comes in just shy of our goal. Yum! Brands (NYSE: YUM  ) , McDonald's most powerful global rival, pays a completely uninspiring 1.7%.
  • We like to see dividend payout ratios of 50% or less; the lower the percentage, the more sustainable it is. At 48%, McDonald's is right in the comfort zone. Yum! may come in at 38% for this metric, but McDonald's 48% is as solid as you need.
  • Gross margin is an indicator of brand strength and pricing power. At 39.6% over the past 12 months, McDonald's beats the industry average by about 9%, and easily beats Yum!'s 26.5%.
  • Finally, quarterly revenue for the golden arches was a very healthy 9.8% year-over-year, though not as healthy as Yum!'s 15.4%. And while quarterly earnings growth for McDonald's was a very healthy 10.8% YOY, Yum!'s was positively explosive at 29.9%.

Some of Yum!'s numbers may trounce McDonald's, but remember that Yum! is a younger brand, and much more in its big-growth spurt. The fact is, McDonald's numbers are solid, and its P/E of 19 is a lot more attractive than Yum!'s 23. Combine this with McDonald's 2.8% yield, and there's really no comparison between the two.

2. Intel (Nasdaq: INTC  )
Even though the company is no longer the tech darling it used to be, it's still the dominant semiconductor manufacturer for the computer industry. It's practically a monopoly. And though the company is playing catch-up in the tablet and smartphone chip arena, there are still plenty of laptop and desktop computers being made, making Intel a tech powerhouse that isn't in danger of going out of business anytime soon. To the contrary:

  • We said we like to see yields of around 3%. Intel's 3.2% nicely clears the fence. Peer Advanced Micro Devices (NYSE: AMD  ) doesn't even pay a dividend.
  • Intel's payout ratio is a gentle 33%. No complaints there.
  • Intel's gross margin is a beautiful 62.5% over the trailing 12 months, crushing the industry average of 42.2%, as well as AMD's 44.8%.
  • Quarterly revenue for Intel grew at a big 21.2% YOY versus AMD's 2.5%, with quarterly earnings for Intel up a solid 5.7%.

Intel's stock trades for $26 per share with a P/E of 11, similar to AMD's P/E, but that's where any similarities between the two companies end. Intel is a still healthy, growing tech giant that pays a great, sustainable dividend. It's good to be the king, especially for investors.

3. McCormick (NYSE: MKC  )
Yes, we're talking about the spice company here, but it's more than just the racks upon racks of bottled herbs and spices. The 123-year-old company also makes seasoning mixes for many different styles of cooking, extracts and food colorings, grill seasonings, and seafood seasonings. McCormick is ubiquitous in kitchens throughout America, which is clearly shown in the company's numbers:

  • McCormick pays a dividend of 2.5%, under our goal of 3%, but still generous.
  • The company's payout ratio is a very sustainable 41%.
  • The gross margin is a healthy 41.2% TTM, handily beating the industry average of 31.2%.
  • Quarterly revenue grew a more-than-healthy 13.4% YOY, while quarterly earnings YOY were down just a hair at -1.4%.

The stock itself trades for $52 per share with a P/E of 18. Commodity prices are up around the world, which could explain the declining earnings, but the company is iconic for cooks and is financially solid otherwise. McCormick rules its niche, and isn't going away anytime soon.

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Fool contributor John Grgurich still loves the odd Filet-O-Fish sandwich, no matter what it's actually made of, but owns no shares of any of the companies mentioned in this column. The Motley Fool owns shares of Yum! Brands and Intel. Motley Fool newsletter services have recommended buying shares of Intel, McCormick, Yum! Brands, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a scintillating disclosure policy.

Read/Post Comments (6) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2012, at 2:59 PM, 86FoxyN wrote:

    Or instead of MCD you could go with PG. 3.1% Dividend and you don't have to worry about them serving you the "Pink Goo"

  • Report this Comment On February 27, 2012, at 3:51 PM, TEBuddy wrote:

    MCD doesnt serve pink goo anymore, it was removed last year, although there was technically nothing wrong with it. You just have to be a chemist to understand.

    Intel is nice, if all you want is dividends of 3%. Dont expect a lot of return other than that in the next 10 years. Intel did a really smary thing getting into the SSD business, that will continue to grow, but processors will likely shrink as AMD and other competitors come out with more compelling values. And more and more SSD competition as well.

  • Report this Comment On February 27, 2012, at 11:56 PM, jdwelch62 wrote:

    @TEBuddy: Really? What "more compelling values" are in the works from AMD? And really, who are Intel's true competitors? Intel is 2-going-on-3 generations ahead of everyone else who has a fab (which AMD no longer does), & is just starting its push into the nacient mobile market (check news releases from Barcelona this week). Intel has crushed the Street's estimates consistently for over 2 years and running. I think there's a lot more that Intel has to offer than just a great dividend, but then again, this article was about great dividends in the first place...

  • Report this Comment On February 28, 2012, at 12:02 AM, jdwelch62 wrote:

    (...but you are right about Intel & SSDs, and that's something that tends to get overlooked with all the distractions about how "the PC is dead" and "Intel is late to the mobile party"... In 5 years you'll see a lot more SSDs as standard equipment, as the prices come down & notebooks (Ultrabooks) get thinner & less power-consumptive; I think you'll see them in more data centers, too, since they consume so much less power & give off less heat than spinning disks...)

    Fool on! :-)

  • Report this Comment On February 28, 2012, at 5:37 AM, TEBuddy wrote:

    AMDs llano and Brazos are already much more compelling for small notebooks than anything Intel has. AMD's Trinity will simlpy blow the next gen intel out of the water. These represent values, not top of the line performance, but top of the line performance per dollar and performance per watt. AMD already has better battery life and better graphics, whats not compelling about that? The battery life is a complete 180. Now, can Intel even compete in the mobile phone market? Can those that are in the mobile phone market compete in the ultrabook market?

    Intel is not 3 or even 2 generations ahead. There are plenty of places making 22nm silicon out there, and maybe AMD is only at 32nm, but still gets more out of it than Intel can.

    Intel crushes estimates because they set them low. They make a lot of money, and a lot of it was illegally by the way. At the end of the day you might not care how the money was made.

  • Report this Comment On February 28, 2012, at 2:38 PM, jdwelch62 wrote:

    What are you basing your claims on, sir? I know that NAND and other memory products are being manufactured at the 22nm and smaller nodes, but no one besides Intel is manufacturing *processors* at 22nm. AMD doesn't own any fabs anymore, and it was widely reported that Global Foundries was having so many yield problems at 32nm that AMD had to turn to TSMC to act as their foundry to keep their production levels up (and TSMC was having problems with 32nm, too, if I'm not mistaken). Intel is currently constructing a 14nm fab in AZ; I think TSMC is working on an 18nm fab, but I could be wrong about that. How can you say that AMD "still gets more out of [32nm] than Intel can"? In what sense?

    Core i5 and i7 processors (for laptops) have been outselling Core i3 processors, indicating that the OEMs are opting for the higher performance processors for their products, presumably based on consumer demand for those products. So how is a "value" processor "more compelling"? Seems like Joe Consumer wants top of the line performance, and they're willing to pay for it.

    Intel has been crushing the Street's estimates (which is what I stated), which Intel does not set, so Intel setting low estimates is irrelevant (although, if you read their guidance, Intel has been meeting and just-exceedining their own estimates; it's the Street's estimates that are low which Intel has been "crushing").

    Finally, stating that "a lot of [the money Intel made] was [done so] illegally" is slander (or is it libel?), since they settled with the US gov't without admitting to any wrongdoing, and the requirements imposed by the settlement were business processes that they already were conducting, so that was a non-event. They were not found guilty of any illegal business practices. Then, just recently, Intel settled with the State of NY and their claim, and ended up only paying for the NY Attorney General's office's legal fees. No admission of guilt, no illegal conduct proven. In the case of the EU, Intel agreed to pay the fine, but maintained that they had not done anything illegal and are appealing the decision (but, being good corporate citizens, paid the fine upfront, then appealed). So it's very thin ice you're on to claim that Intel obtained their profits "illegally", since there is no evidence to support that claim (merely allegations)...

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