Can You Trust the McDonald's Dividend?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Income investors love stability. A rock-steady stock chart comes in handy if you ever find a reason to sell your cash-dispensing shares, but predictable dividends are where the real magic happens.

Today, I'll take a closer look at dividend hero McDonald's (NYSE: MCD  ) . The fast-food king has absolutely crushed its peers in the Dow Jones Industrial Average (DJINDICES: ^DJI  ) index over the last decade, and dividend payments have made a large difference along the way:

MCD Chart

MCD data by YCharts.

At today's prices and payouts, Mickey D's generous 3.3% yield tied with Microsoft (NASDAQ: MSFT  ) for the seventh-richest yield on the Dow. But can we expect McDonald's to keep paying these huge dividends?

Over the last four quarters, McDonald's generated $3.9 billion in free cash flows, of which $2.8 billion was returned to shareholders in the form of dividend checks, making for a 72% cash payout ratio.

You may call it a generous policy, but I find it a little scary. Many high-yield stocks support their payouts with a much smaller portion of their cash flows. For example, Microsoft put just 26% of its free cash into that 3.3% yield over the last year. That's a far more sustainable payout.

To put the current policy in a different perspective, McDonald's allocated just 25% of its free cash to dividends in 2003. Going back to that ratio would result in the Dow's second-lowest yield -- a meager 1.1%. Moreover, McDonald's has spent about $3 billion annually on share buybacks in the last six years. In other words, the company is dipping into the cash register to keep its shareholders happy.

McDonald's shareholders would be wise to keep an eye on this worrisome trend. It's not clear that the company can keep both dividends and buybacks this generous for much longer -- and investors hate to see dividend cuts. This market-beating chart could turn ugly in a hurry.

After making investors rich in 2011, McDonald's was one of the worst-performing blue chip stocks of 2012. Our top analyst on the company will tell you whether you should be worried by this trend, and he'll shed light on whether McDonald's is a buy at today's prices. Click here now to read our premium research report on the company.

Read/Post Comments (0) | Recommend This Article (6)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2266361, ~/Articles/ArticleHandler.aspx, 9/27/2016 4:49:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,228.30 133.47 0.74%
S&P 500 2,159.93 13.83 0.64%
NASD 5,305.71 48.22 0.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 4:20 PM
^DJI $18228.30 Up +133.47 +0.74%
MCD $116.88 Up +0.35 +0.30%
McDonald's CAPS Rating: ***
MSFT $57.95 Up +1.05 +1.85%
Microsoft CAPS Rating: ****