Investing in dividend stocks can be a great way to supplement income in retirement. Regardless of what you will use it for, dividend stocks deliver cash payouts to their shareholders at regular intervals.
Of course, a significant factor in determining which dividend stock to buy is the reliability of its payment. That's one reason McDonald's (MCD -0.75%) is my favorite dividend stock to buy in March; the company has a long history of regular payments and a long history of regularly raising its payments annually, qualifying it as a Dividend Aristocrat.
Here's what else I like about this top dividend stock.
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Digital ordering is a huge benefit for McDonald's
Like nearly all restaurant chains, McDonald's got caught up in the initial harmful effects of the pandemic, which eventually caused sales to decrease by 10.1% in 2020. But the company adjusted well to the health restrictions put in place, emphasizing digital ordering options and drive-thru services when consumers were not allowed to dine inside restaurants. The plan worked. Digital systemwide sales exceeded $18 billion in 2021 and represented over 25% of sales in its top six markets.
Digital sales have a twofold benefit. First, they expand the reach of McDonald's restaurants. One form of a digital order is through a third-party food delivery service. Folks who might be unable or unwilling to drive to a McDonald's restaurant will now consider it an option if the meal can be delivered.
Second, digital orders reduce the need for as much staff at McDonald's restaurants, improving profitability. That staff reduction ended up being helpful as the restaurant chain health with ongoing widespread labor shortages. The combination helped McDonald's in 2021 to deliver its best annual earnings per share level in the last decade. The $10.04 EPS generated comfortably exceeded the previous high of $7.88 in 2019.
Why is that important for dividend investors? Because dividends are paid out of earnings. A company without healthy earnings growth cannot sustainably pay and increase its dividend. Eventually, it would use up all of its EPS and have to borrow money to pay dividends. A good metric to determine the sustainability of a company's dividend is the payout ratio. It measures the percentage of earnings paid out in dividends. For McDonald's, that ratio is a very manageable 51.9%.
McDonald's dividend per share was $5.25 in 2021, up from $2.87 per share a decade earlier. With solid earnings growth, it could continue increasing its dividend over several years.
An excellent potential to increase dividends per share
As of this writing, McDonald's dividend yields a solid, but unimpressive 2%. That means a $1,000 investment will bring $20 per year in dividends. And the chain has excellent potential to increase dividends per share over time.
The significant shift in consumer behavior with regards to its digital operations could allow McDonald's to reach a wider group of consumers more frequently. Already, there is evidence of this in its 21% systemwide sales growth in 2021 coupled with its highest earnings per share in the last decade. For those reasons, McDonald's is my top dividend stock to buy in March.
