The beauty of the dividend growth investing strategy is that a steadily increasing stream of income can help put things into perspective. This perspective drastically reduces the risk of an investor getting caught up in day-to-day price swings that can cloud judgment and result in hasty decisions.
One dividend growth stock that should arguably be in every portfolio is McDonald's (MCD 0.63%). But with shares trading near their all-time high, you may be questioning whether you should still take the plunge. Let's consider four reasons McDonald's is still a great dividend growth stock.
1. McDonald's delivered a solid third quarter
McDonald's business performed well in the third quarter as the stock beat analysts' revenue and earnings estimates. Revenue was up 14% year over year to $6.20 billion, coming in just above the $6.04 billion analyst consensus.
Increased vaccination rates have resulted in the easing of COVID-19 restrictions and fewer closed restaurants for McDonald's, which contributed to the strong growth for the company, especially in its international markets.
Another important development was the nationwide launch of the MyMcDonald's Rewards program in July. Since the rollout, the company has signed on 21 million members with 15 million actively earning rewards, according to CFO Kevin Ozan's comments in the latest earnings call.
And with CEO Chris Kempczinski pointing to launches of MyMcDonald's in other major markets like Canada, the U.K., and Australia over the next few months, the company's growth prospects look promising. Analysts expect McDonald's to generate 22% annual earnings growth over the next five years.
McDonald's was also able to improve its net margin over two percentage points to 34.7% in the latest quarter. This allowed the company's adjusted earnings per share (EPS) to soar 24% year over year to $2.76.
2. The balance sheet is strong
McDonald's operating fundamentals are encouraging, but the health of its balance sheet is yet another reason income investors should love the stock.
At first glance, the fast-food leader has a significant debt balance of $35.1 billion, but when viewed against its nearly $12 billion of earnings before interest, taxes, depreciation, and amortization (EBITDA) from the past year, its 3.1 debt-to-EBITDA ratio is quite reasonable.
And amongst its fast-food peers, you can see in the chart below that McDonald's is far from overextending its balance sheet.
3. Capacity to support future dividend increases
A healthy balance sheet is essential, but it's just as vital for an established dividend payer like McDonald's to have a sustainable dividend payout ratio.
Based on analysts' estimates for $9.41 per share in earnings this year, the stock's payout ratio comes out to 59%. And with $6.7 billion of free cash flow generated in the trailing 12 months, this Dividend Aristocrat has plenty of flexibility to build on its 45 consecutive years of dividend increases.
The stock offers a market-beating 2.1% yield to investors as of this writing.
4. The valuation is still attractive
Despite its robust fundamentals and sterling track record as a dividend-paying stock, McDonald's isn't as expensive as you'd expect it to be.
For instance, the stock's forward price-to-earnings ratio of 25.9 is actually below the restaurant industry average of 26.8. And recall this is a company expected to deliver 22% annual earnings growth over the next five years -- an industry-leading brand with these prospects deserves a premium in my opinion.
The combination of steady dividend and earnings growth makes this stock a buy, even with shares near their peak.