Want a Raise? Look Towards Coca-Cola and McDonalds

These two dividend aristocrats believe in giving their investors raises.

Jun 3, 2014 at 11:08AM

Companies that boosted dividends for the past 25 consecutive years are known as dividend aristocrats . This is important because dividends and dividend raises can significantly add to your investment value over time making you rich slowly. Beverage giant Coca-Cola (NYSE:KO) and global restaurant chain McDonald's (NYSE:MCD) represent good examples of such companies.

However, before investing it always pays to see whether or not a company is growing its revenue and cash flow and retaining some of that cash for future use. It's also good to pay attention to a company's balance sheet to see if it's loaded down with debt and associated interest expenses choking out profitability.


A wide moat
Beverage giant Coca-Cola sells well-known carbonated soda brands such as Coca-Cola, Sprite, and Fanta. It also sells non-carbonated beverages such as Minute Maid juices, Dasani bottled water, and tea.
 Coca-Cola's bottler system represents the largest distribution system in the world providing a moat against competitors.  Over the past 10 years Coca-Cola grew its annual revenue, net income, and free cash flow 116%, 77%, and 53% respectively. 

Coca-Cola sports an excellent balance sheet with cash and long-term debt to equity ratios registering at 49% and 57% respectively in the most recent quarter. It's preferable that a company's long-term debt to equity ratio resides at 50% or less. However, Coca-Cola's operating income exceeds interest expense by a comfortable 19 times. The rule of thumb for safety resides at five times or more.

Dividend sustainability should be gauged by the percentage of free cash flow the company pays in dividends each year since free cash flow can't be manipulated as much by share buybacks or accounting. Last year Coca-Cola paid out 61% of its free cash flow in dividends. Currently the company pays its shareholders $1.22 per share per year and yields 3% annually.

Coca-Cola's solid fundamental strength translated into capital gains of 60% over the past 10 years. Reinvesting dividends during that time added 52%, nearly doubling the total shareholder return to 112%. Dividends and dividend raises can really make a difference. 


Money at the end of the golden arches
McDonald's and its franchisees operate nearly 35,000 restaurants worldwide. McDonald's maintains No. 1 market share  in North America according to the Bloomberg Industry Leaderboard. Moreover, McDonald's resided in the No. 5 spot in terms of brand value according to Brand Z . Brand value and its ubiquity provide competitive advantages for the company. Its distinctive golden arches serve as a draw for consumers.

Over the past 10 years McDonald's grew its revenue, net income, and free cash flow 51%, 145%, and 73% respectively.  McDonald's cash position equated to 17% of stockholder's equity last quarter. However, it leans more to the overleveraged side with long-term debt to equity clocking in at 86% of stockholder's equity, but operating income did exceed interest expense by 14 times .

Last year, McDonald's paid out 73% of its free cash flow in dividends which resides in the high range, but with 35,000 locations worldwide the room for expansion gets smaller which means the company feels that it should return more cash to shareholders. McDonald's fundamental strengths translated into capital gains of 287% over the past 10 years. Reinvesting dividends during that time added an astounding 132% to shareholder return bringing the total to 419%. 

More raises to come
Coca-Cola's distribution system, emerging markets expansion, and market dominance will ensure continued dividend raises and capital gains for years to come. McDonald's recently announced that it committed to returning $20 billion to shareholders in the form of dividends and share buybacks over the next couple of years.  With global saturation investors shouldn't expect too much on the capital gains side for McDonald's. However, company managers will see to it that investors see more cash. 

Want to see even more cash?
The smartest investors know that dividend stocks like Coca-Cola and McDonald's simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

William Bias owns shares of Coca-Cola and McDonald's. The Motley Fool recommends Coca-Cola and McDonald's. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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 disclosure policy.

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