1 Great Dividend You Can Buy Right Now

This gigantic restaurant chain reinstated its dividend in 2013 with a 200% increase from its payout prior to the recession. Find out what company is behind this nearly 4% yield.

Jun 20, 2014 at 1:38PM

Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.

Today, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that this stock doesn't share the same macro risks that other companies have, but it's a step above your common grade of dividend stock. Check out the previous selection.

This week, we'll turn our attention to the casual dining sector and highlight a long-term growth story set to pay out handsome dividends to shareholders: DineEquity (NYSE:DIN).

Source: Joe King, Flickr.

A highly competitive business
Through the past two-plus years that I've run this series, we've always begun with the challenges that a highlighted company faces; and like all of its predecessors, DineEquity, the company behind Applebee's -- the nation's largest casual-dining chain -- and IHOP has a number of challenges it will have to overcome.

Perhaps nothing is a greater concern for Applebee's than the fact that the restaurant sector is riddled with competition. The casual-dining category has brand-name competition from the likes of Chili's, growing pressure from hybrid restaurants like Chipotle that offer quick but nutritious food in a sit-down environment, and even fast-food chains, which can handily undercut casual dining chains on price and speed of food delivery. This makes standing out from the crowd difficult for casual-dining restaurants like Applebee's and IHOP unless they offer customers promotions that entice them into their restaurants. While they improve traffic, these promotions can be margin killers if used improperly.

Another concern that restaurants have to contend with is the rising cost of food and labor. Food costs have been generally under control for the past couple of years; however, the Consumer Price Index has dealt consumers three pretty sizable increases over the past four months, possibly signaling that costs, including food costs, are beginning to head higher.

By a similar token, measures being undertaken in Seattle, which will phase in a minimum wage increase to $15 per hour over the coming years, could have a huge impact on restaurant and service sector pricing. Though a federal minimum wage boost to $10.10 per hour has stalled out in Congress, the pressure of wage increases isn't likely to go away anytime soon. If restaurants are unable to pass along price increases to consumers, these costs could get the better of them.

Finally, investors should understand that the restaurant industry can be inherently cyclical because it's intricately tied to consumer spending -- which, in turn, ebbs and flows along with the health of the U.S. economy. Contractions within the sector are to be expected every now and then.

The DineEquity advantage
In spite of these concerns, I suspect that DineEquity has multiple avenues of growth that could reward investors with impressive share price and dividend growth over the long term.

Presto Table Top

Source: E la Carte

Perhaps no factor offers DineEquity a better opportunity of standing out from the crowd than its complete rollout of 100,000 consumer-facing tablets at its 1,800 Applebee's locations over the coming year. Make no mistake, purchasing 100,000 tablets isn't cheap and the rollout isn't going to be flawless. Nothing of this scale has ever been attempted before, so it'll take some getting used to from the aspect of both servers and customers. Buffalo Wild Wings and Chili's Bar and Grill owner Brinker International have both tested tablets in select restaurants and have also decided to turn to tablets as a solution to attract a younger crowd and improve business. But it's Applebee's that'll likely be the first to have its full system in place, and thus the first company in line to really see big benefits.

To begin with, consumer-facing tablets give consumers the ability to place their drink, appetizer, and dessert orders ahead of being greeted by their server, helping to improve food and drink delivery efficiency and instilling a sense of control in the customer. Furthermore, these tablets give consumers the ability to pay without waiting for their server, which ultimately may help restaurants turn their tables faster and lead to bigger profits.

Secondly, these tablets give restaurants a way of attracting families with young children that have been reluctant to go out to eat primarily because they fear trying to entertain their child or children in a public setting. The ability to load games and other forms of media on tablets could attract an oft-ignored group of consumers back into Applebee's.

Finally, tablets give users the ability to voice their feedback at the push of a button. Restaurants have a difficult time figuring out how they can improve if consumers don't offer their opinion, and the current system of phoning in or going on your mobile device or PC to complete a review delivers few results. By providing consumers the instant ability to offer feedback with a tablet directly in front of them, restaurants like Applebee's will be able to respond quickly on a restaurant-by-restaurant basis to consumer concerns, which I expect will boost its image and business profitability.

Source: Mike Mozart, Flickr.

Menu changes have been another source of growth for DineEquity. Two years ago DineEquity chose to completely revamp IHOP's menu by stripping it down to the basics and enticing customers with traditional value meals. It appears to have worked, with IHOP's domestic systemwide same-store restaurant sales up 3.9% in first quarter compared to the prior year. Applebee's same-store sales slipped 0.5% in Q1, but I'd attribute this more to weather conditions than an endemic problem with the chain. 

Finally, DineEquity is looking to boost its growth potential by looking overseas. By entering new markets, especially emerging markets, DineEquity may be able to avoid the cyclical swings often associated with the restaurant industry within the U.S.


Source: Tax Credits, Flickr

Show me the money
But let's have a look at why we're really here today: DineEquity's incredible dividend.

Between 2003 and 2008 DineEquity paid a pretty fair quarterly payout of $0.25 per share. At $1 annually, this was often more than enough to attract income-seeking investors. But the Great Recession changed all that. DineEquity chose not to pay a dividend between 2009 and 2012 in order to address its debt situation and realign its growth strategy.

Apparently that growth plan worked really well, because in February 2013 DineEquity announced a quarterly payout of $0.75. In other words, DineEquity boosted its payout from what was a low-to-mid 2% yield between 2003 and 2008 to a yield that's getting really close to 4% despite its share price doubling. This means income investors can actually get a better yield by purchasing DineEquity than a 30-year Treasury bond! Furthermore, with a payout ratio of 68% this year and 58% based on its forward earnings, it's evident not only that DineEquity is doing right by shareholders, but also that its payout is in all likelihood sustainable.

And as added icing on the cake, DineEquity also approved a $100-million-share repurchase agreement in February 2013 that removes outstanding shares and can make the company appear more attractive from a valuation basis.

Obviously, it's not going to be a clear path to success for DineEquity, but being among the first to adopt consumer-facing tablets with its Applebee's brand, and recognizing its overseas opportunity with IHOP, I'd suggest that DineEquity could deliver impressive share price and dividend growth for patient shareholders over the long haul.

Want more high yield dividend stocks? Here are some of our top analysts' latest selections! 
The smartest investors know that dividend stocks 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.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of and recommends Buffalo Wild Wings and Chipotle Mexican Grill. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers