Investing in dividend stocks can be an excellent way to increase your wealth over time. It can also generate a stream of passive income. Indeed, there are several benefits in investing in stocks that pay you at regular intervals.
My favorite dividend stock to buy in September is McDonald's (MCD -0.05%). The company has done an excellent job adjusting to evolving consumer behavior and is becoming a more robust business out of the pandemic. Here's what makes McDonald's an outstanding dividend stock to buy.
A passive income machine
McDonald's sales decreased in the earlier stages of the pandemic when governments imposed restrictions on dining at restaurants. As a result, sales fell by 10% to $19 billion in 2020. Earnings per share fell by 20% to $6.31.
That said, management adapted quickly, emphasizing its digital channels, and sales promptly rebounded. In 2021, McDonald's revenue increased by 21%, and earnings per share rose by 59% to $10.04.
Since the pandemic's onset, one of the rapidly growing segments of the economy has been that of food delivery. That has helped McDonald's grow sales and profitability by reducing staffing needs at restaurants and expanding the occasions customers can choose McDonald's. Before food delivery options, customers could only buy McDonald's by driving or walking to their nearest location. Now you can get McDonald's delivered to your home or office if, for any reason, you cannot visit the closest restaurant.
That's critical for dividend investors because dividends are paid out of earnings. Like your household, if a business pays more in dividends than it earns in profits, it will soon run out of cash. Sure, it can sustain the payment for a little while as it burns through savings and exhausts borrowing limits, but eventually, it will pause or reduce the dividend. Fortunately, investors need not worry about that happening with McDonald's.
MCD Payout Ratio data by YCharts
Most recently, McDonald's dividend payout ratio, which measures the percentage of earnings it paid in dividends, was 66%. That leaves room for McDonald's to sustain its dividend even if profits decline moderately. From 2012 to 2021, McDonald's increased its dividend per share from $2.87 to $5.25.
McDonald's payments offer investors a dividend yield of 2.2%. Admittedly, this may not look attractive, considering several government bonds offer yields above 3%. However, remember that government bonds offer the same payment for the entire duration, whereas investors can reasonably expect McDonald's to increase its dividend payment over time.
MCD Dividend Yield data by YCharts
Resiliency in a recession
Investors can buy this passive income machine at a relatively fair price. McDonald's is trading at a price-to-free cash flow of 32, which is about the average it has sold for in the last five years.
Further, the stock could provide your portfolio some protection in the event of a recession. McDonald's is one of the lowest-cost fast-food options available to consumers. If their income falls, they might substitute a visit to McDonald's for more expensive away-from-home options.
