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1 Top Dividend Stock for Retirees

By Joe Tenebruso - Dec 1, 2017 at 8:02PM

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Ever dreamed of owning a franchise? This business gives investors a way to do so with a lot less risk.

Retirement just isn't what it used to be. Faced with the prospect of dwindling pensions, inadequate retirement savings, and longer life expectancies, many retirees are choosing to open businesses -- often of the franchised variety -- in order to grow their wealth and fund their lifestyles.

Yet another option exists that can provide retirees with much of the wealth-accumulation benefits of owning a franchise, without the need to incur the burdens of operating one: investing in the stocks of the best franchises. To help you in this regard, I've found one franchise stock that currently offers a particularly appealing combination of strong growth potential, bountiful dividend income, and relatively low risk -- all at an attractive price. Read on to learn more about it.

A dollar sign and an arrow pointing forward

Image source: Getty Images.

Despite their ubiquity, coffee shops in the U.S. and around the world still have room for significant growth -- and Dunkin' Brands Group (DNKN) intends to seize this opportunity. Dunkin' Brands believes it can eventually grow its Dunkin' Donuts store count to over 18,000 U.S. locations, up from slightly more than 9,000 at the end of the third quarter.

That may come as a bit of a surprise if you live on the East Coast, where Dunkin' Donuts stores are common. But in much of the rest of country, Dunkin' Donuts restaurants are a much rarer sight -- the company only has about 480 locations in its "West" market, an area that spans from the central U.S. to the West Coast and contains heavily populated states such as Texas and California.

Dunkin' Donuts has more than 8,500 stores in the Eastern U.S. compared to less than 500 in the Central and West U.S.

Image source: Dunkin' Brands Group Q3 2017 Investor Presentation.

Moreover, Dunkin' Brands is now a 100% franchised  operation. This should help to accelerate the company's expansion, as franchisees will provide the majority of the capital to open new restaurants.

Even better, Dunkin's franchise model produces a steadily rising stream of high-margin royalty and rental-income payments. In turn, the company passes these recurring cash flows on to investors in the form of share repurchases and a steadily growing dividend -- both of which help to support a rising stock price.

DNKN Chart

DNKN data by YCharts.

In addition, Dunkin' Brands is rumored to be a takeover target of JAB Holdings, the owner of Krispy Kreme, Caribou Coffee, and Keurig Green Mountain, as well as the recent acquirer of Panera. Panera was purchased at a 20% premium to its then market price, suggesting that Dunkin' could fetch more than $70 per share if JAB were to make a bid for it.

I should note, however, that at The Motley Fool, we never recommend buying a stock on hopes of a buyout, for the simple reason that it may not occur. But if you buy Dunkin' Brands for its fundamentals, a possible acquisition is just another way you could see sizable gains in the years ahead.

All told, Dunkin' Brands gives its shareholders multiple ways to win. The company's core product -- coffee -- is habitually purchased and rather addictive. Its franchise model provides steady and reliable cash flows, while containing ample room for growth. Throw in a solid 2.2% dividend yield, a low payout ratio (dividends comprise only about 55% of Dunkin's earnings), and an attractive valuation -- shares currently trade at about 21 times free cash flow -- and you have all the makings of the type of high-quality, yet relatively low-risk, dividend growth stock that could fit well in a retiree's diversified investment portfolio.

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