Consumers know McDonald's (MCD -0.19%) well for its burgers, but investors might know it best for its dividends. The famous fast-food chain has a long history of regular payouts, qualifying it as a Dividend Aristocrat -- meaning that it has paid and increased its dividend for at least 25 years. In fact, McDonald's has paid a growing dividend for 45 years, which puts it well on its way to becoming a Dividend King.
Of course, many investors use dividend stocks to supplement retirement income. So a stock with a long history of paying a dividend provides an extra degree of reliability. After all, if it has sustained its dividend for over 45 years, it has probably weathered at least a few economic downturns.
Let's take a closer look at McDonald's and its ability to pay a dividend to determine if it's a stock that income investors should buy in February.
McDonald's stock boasts a dividend yield of 2%. Image source: Getty Images.
All signs point to continued dividend growth
On Jan. 27, McDonald's announced operating results for its fourth quarter and fiscal year ended Dec. 31. Among the several impressive figures found within the report is its earnings per share (EPS) of $10.04 for 2021. That was 59% higher than in 2020 and by far the highest the company has earned in the past decade.
In the long run, dividends are sustained by earnings. If a business pays out more in dividends than it generates in profits, it's like a household spending more than it earns. Eventually, savings will run out or credit cards will get maxed out, and spending will forcefully adjust to income. Since dividends are paid out from earnings, the growth in EPS is an excellent sign for income investors.
As of this writing, McDonald's stock boasts a dividend yield of 2.03%. That said, the company's robust earnings growth leaves room for it to keep increasing its dividend -- and the company has a long history of doing so. Investors in McDonald's stock have seen their annual dividends per share increase from $2.87 in 2012 to $5.25 in 2021.
Indeed, its dividend payout ratio, which is the portion of earnings it chooses to pay in dividends, is 51.9%. That rate is near to its lowest in the past five years. Note that the rate decreased not because McDonald's lowered its dividends but because earnings increased dramatically.
Moreover, because McDonald's operates on a franchise business model, where franchisees put up the capital to open new restaurants, this enables it to provide a higher dividend payout without restricting growth.
Is McDonald's a dividend stock to buy?
McDonald's is arguably in an excellent position to continue paying and increasing its dividend. The stock is not expensive either. According to its price-to-earnings ratio of 25.8 and its price-to-free cash flow ratio of 27.4, McDonald's is trading at roughly its average valuation over the previous five years.
Considering that McDonald's is coming out of the economy's reopening stronger than ever, as demonstrated by its robust earnings, the stock is a relative bargain. Income-seeking investors can feel good about adding McDonald's stock to their portfolios in February.
