Income investors looking for an excellent way to generate $5,000 per year have come to the right place. Whether looking to supplement retirement income or build wealth in anticipation of retirement, passive income can be a powerful tool.
One excellent method of passive income is through dividend stocks. With quarterly payments, income investors can derive a recurring cash stream while working full-time in careers or sipping pina coladas in a retirement community.
And one of my favorite dividend stocks right now is McDonald's (MCD 1.70%). If you're looking for $5,000 in passive income per year, you can achieve that goal by purchasing 952 shares of McDonald's stock. As of the market close on May 27, McDonald's stock was selling at $252 per share. Read more to find out why McDonald's is one of my favorites and see what happens to the $5,000 in passive income over future years.
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McDonald's has increased its dividend meaningfully
Sure, buying 952 shares of McDonald's stock will get you $5,000 in passive income annually. However, that is a minimum figure. Over the previous decade, McDonald's has increased its dividend per share from $2.87 to $5.25. That means dividend investors who bought McDonald's stock in 2012 are now getting nearly twice the dividend payment they were when they first purchased shares. The same could be true of McDonald's investors today.
MCD Dividend Per Share (Annual) data by YCharts
Note that dividends are paid out of earnings. Profits are the only sustainable source of dividend payments in the long run. You may have heard of other schemes promising payments from different sources, but I would be skeptical of those. Dividends are very much like household budgets -- spending above your income is unsustainable. Sure, you can support your spending for a while through savings and credit cards, but eventually your savings will run out and your credit cards will cut you off.
For that reason, income investors should be reassured by the fact that McDonald's delivered record profits in 2021. Earnings per share of $10.04 was a 59% increase from 2020, when the pandemic forced it to close restaurants temporarily to in-person diners. Management made prudent investments, emphasizing digital sales channels, which paid off handsomely. These capabilities will likely lift McDonald's sales and profits for several years more.
MCD Payout Ratio data by YCharts
McDonald's dividend payout ratio, which measures the percentage of earnings paid out in dividends, most recently was only 56%. That means McDonald's reinvested the rest of its earnings into the business on initiatives like digital ordering kiosks, a mobile app, and menu item innovation.
McDonald's stock is fairly priced
MCD PE Ratio data by YCharts
Investors can be comforted to know they would not be paying an expensive price to achieve the $5,000 passive income. McDonald's is trading at a price-to-earnings ratio of 26.6 and a price-to-free-cash-flow ratio of 26.7. Historically speaking, McDonald's stock is fairly priced, according to the aforementioned metrics.
So, investors looking for $5,000 per year in passive income have a quality option with McDonald's stock. Better yet, if you buy and hold McDonald's stock for the very long term (20 or 30 years), it's probable that the passive income from these shares could double or even triple.
