Coca-Cola (NYSE: KO) and McDonald's (NYSE:MCD) are two of the most renowned dividend stocks, with dividend histories stretching back decades. But which consumer goods juggernaut is the better bet for the next 10 years?
Both Coca-Cola and McDonald's have outstanding dividend track records, but Coca-Cola's dividend history tops McDonald's.
Coca-Cola has paid a quarterly dividend since 1920, and has increased its dividend every year for the past 55 years. This beats McDonald's, which has raised its dividend every year since initiating its first dividend in 1976.
Coca-Cola also outperforms McDonald's when it comes to more recent dividend history. Over the past three years, Coca-Cola's dividend increased each year by an average rate of 6.7%. During this same period, McDonald's average increase was 5.1%. Similarly, Coca-Cola's most recent dividend hike of 5.7% was higher than McDonald's increase of 5.6%.
As recently as a few years ago, McDonald's dividend yield was regularly higher than Coca-Cola's. But as McDonald's stock surged 70% higher in the past three years while Coca-Cola's only climbed about 10%, McDonald's dividend yield has subsequently fallen well below Coca-Cola's.
McDonald's currently has a dividend yield of about 2.4%. This compares to Coca-Cola's tastier dividend yield of about 3.1%.
Coca-Cola is the clear winner when it comes to dividend yield.
Of course, investors should be sure to look beyond a dividend's yield to judge how good it is. Investors should also be interested in a dividend's sustainability and growth potential.
As far as sustainability goes, both Coca-Cola and McDonald's annual dividend payments are far enough below free cash flow to be sustainable. Coca-Cola paid out 73% of its trailing-12-month free cash flow in dividends and McDonald's dished out 77% of free cash flow during the same period.
But McDonald's business seems to be performing better recently, helping explain the company's rising stock price. McDonald's adjusted trailing-12-month EPS is up about 16% while Coca-Cola's is down 3% during the same period. Given these trends, McDonald's dividend could see more growth than Coca-Cola's thanks to the company's better-performing bottom line. Of course, any dividend growth outperformance for McDonald's in the near term would likely only be slight given Coca-Cola's advantage of currently paying out a smaller portion of free cash flow.
Considering Coca-Cola's greater wiggle room for its dividend payments and McDonald's recent impressive bottom-line growth, it's a tough call to say which company has a higher-quality dividend. But considering how important earnings-per-share growth is to both a dividend's sustainability and its future growth potential, McDonald's dividend looks slightly more attractive when it comes to quality.
So, which stock is ultimately the better bet for dividend investors? Thanks to a meaningfully higher dividend yield, more free cash flow wiggle room for dividend increases, and greater dividend growth in recent years, I'd bet on Coca-Cola stock over McDonald's. McDonald's is a great dividend stock, but its 70% surge in the past three years has suppressed its dividend yield too low to compete with Coca-Cola.
Editor's note: A previous version of this article contained incorrect EPS figures, which have been amended. The Fool regrets the error.