Is Wendy's or McDonald's the Better Dividend Stock to Buy?

Fast-food stocks like McDonald's Corporation (MCD -0.42%) and The Wendy's Co. (WEN) pay solid dividend yields to shareholders thanks to their strong cash flow generation and reliable businesses. One of the best aspects of their business is that when the economic environment turns sour, consumers typically scale down their dining habits. This means even in times like 2008 and 2009, when the financial crisis hurt many companies, fast-food companies kept their profits afloat.

This might make you think McDonald's and Wendy's are an income investor's dream. But of course, no company is without its fair share of challenges, and that includes these two. Both are experiencing some challenges that should be considered before jumping in.

Despite their seemingly identical businesses, let's dig a little deeper to discover which of the two burger giants might be the better dividend stock to buy today.

Both are good picks for dividend investors
Here's how McDonald's and Wendy's stack up when it comes to some crucial dividend metrics:

As you can see, McDonald's has the edge when it comes to current dividend yield. McDonald's offers a solid dividend yield. In addition, your income potential can grow even higher in the future because McDonald's has a good track record of raising dividends at a satisfactory rate. And, since it distributes less than two-thirds of its profits as dividend payments, it's a good bet the company will keep increasing its dividend on an annual basis.

Wendy's offers a lower yield than McDonald's, but it makes up for that with higher dividend growth potential. Wendy's is still in the middle stages of a strategic turnaround. Its franchising activity and revamped menu are generating substantial profits. Wendy's only distributes about half of its diluted earnings per share as dividends, which accounts for some of its higher dividend growth.

It's worth noting, however, that even though Wendy's five-year compound annual dividend growth rate looks spectacular, its dividend growth has slowed more recently. Wendy's hasn't increased its dividend in the past year.

Future growth prospects unclear
McDonald's is battling several headwinds, including shifting consumer preferences in the United States and a public relations firestorm regarding food safety in China. The past two months of its sales data have reflected this. Comparable sales were flat last quarter, and McDonald's produced just 1% growth in earnings per share. Its U.S. operations were the primary culprit. Comparable sales fell in the U.S. last quarter by 1.5%.

McDonald's has been hoping its international growth would make up for sagging domestic sales, but its reputation deteriorated in recent months in one of its key markets. The company's Asia Pacific, Middle East, and Africa segment produced a 14.5% drop in comparable sales last month.

Meanwhile, Wendy's has largely resisted the temptation to expand overseas. It's still mostly confined to North America, which has worked out well so far. Its turnaround has been built on refranchising activity, which has helped significantly lower costs, since refranchising allows the parent company to pass along maintenance costs to franchisees.

It's worked so far, since Wendy's operating profit soared 92% over the first half of the year. But growth is starting to slow, implying Wendy's might be reaching the limits of what refranchising can accomplish. Operating profit increased 12% last quarter, which is still satisfactory on the surface, but is a much lower rate of growth than Wendy's posted in previous quarters.

The Foolish bottom line
Both McDonald's and Wendy's provide solid, market-beating dividend yields. Moreover, they've each demonstrated a willingness to regularly increase their payouts. Recently though, each has encountered some difficulties in their strategic initiatives.

While McDonald's is struggling in the emerging markets because of a food quality scandal, this is likely to fade with time. And we've seen other fast-food giants like Yum! Brands recover from food quality issues in China fairly quickly. McDonald's is still aggressively investing in new restaurant openings in the emerging markets, which will fuel future growth. 

Wendy's situation seems a little more concerning from a long-term perspective. There's an inevitable limit to how much the company can achieve from refranchising. This is might play into why, despite huge dividend increases a few years ago, Wendy's hasn't increased its dividend in more than a year.

This, combined with its significantly higher yield, is why McDonald's is the better dividend pick for investors.