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Don't Overlook This Dividend Stock

By Daniel Sparks – Updated Aug 17, 2021 at 9:23AM

Key Points

  • The dividend history at McDonald's goes back more than 40 years.
  • Earnings are growing rapidly, providing a backdrop for robust dividend growth.
  • The fast-food giant is raking in huge sums of cash flow.

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With both a nice dividend yield and strong dividend growth potential, the Dividend Aristocrat may be a good fit for some investors' portfolios.

Yes, I know you've heard of McDonald's (MCD). Many people pass the fast-food burger chain on their daily commutes and even stop there for lunch, breakfast, or maybe even just a cup of coffee. It's a cultural mainstay. And McDonald's isn't new to the dividend game, either. The company has increased its dividend annually for more than 40 years straight.

Nevertheless, investors looking to bolster their portfolio with more steady income should take a fresh look at the fast-food giant. The stock at least deserves a spot on every dividend investor's watchlist and maybe even a place in his or her portfolio.

McDonald's drive-through in Denton, Texas

Image source: McDonald's.

A growing dividend

It would be difficult to overstate just what a powerhouse dividend payer McDonald's is. With its track record of more than 40 years of consecutive dividend increases, it's no surprise that the company makes the highly regarded Dividend Aristocrats list. To make the list, a stock has to be a member of the S&P 500, have increased its dividend for 25 years or more, and meet market cap and liquidity requirements set by the S&P 500.

McDonald's may be an old business compared with hot tech stocks, but its cash payments are as relevant as ever. Investors who buy the stock today get a meaningful 2.2% dividend yield (annual dividend payments as a percentage of the stock price). Furthermore, meaningful dividend growth has persisted in recent years. Over the past decade, the company's dividend has increased at an average annualized rate of nearly 9%. The most recent announcement of a dividend increase came last October, when management boosted its quarterly dividend by 3% to $1.29, or $5.16 annually. 

The dividend increase "reflects our strong financial position and represents continued confidence in our ability to drive profitable growth and long-term shareholder value while still investing in our people and the business," said McDonald's CEO Chris Kempczinski in a press release about the dividend increase.

A cash-rich business

Kempczinski isn't exaggerating when he says the company has a strong financial position. The company's annualized earnings per share has risen from $5.44 in 2016 to $9.19 on a trailing-12-month basis. With such strong earnings growth, this means McDonald's is paying out just 56% of its earnings in dividends. This, of course, leaves plenty of room for dividend growth. 

Moving over to the company's cash flow statement, McDonald's has raked in more than $7 billion in trailing-12-month free cash flow. This is quite a sum for a growing company that has a market capitalization of $180 billion.

With a robust dividend already, as well as strong dividend growth prospects over the next five years, McDonald's stock is worth a closer look from dividend investors.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

McDonald's Stock Quote
McDonald's
MCD
$273.40 (%)

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