The primary objective of income investing is to pick companies whose dividends are safe and capable of growing over the duration of your investing life. In addition to the retirement benefits that workers collect upon turning retirement age, this reliable stream of rising passive income helps retirees achieve a financially secure retirement.
McDonald's has come a long way since the McDonald brothers opened their first store in 1940 in San Bernardino, California. With a $176 billion market capitalization and almost 40,000 franchised or company-owned restaurants across much of the world, the company has established itself as the most dominant restaurant franchise on the planet.
A variety of ingredients have played a role in the success of the company. First, the affordability of its products via the dollar menu has made McDonald's recession-proof for the most part. Second, buying ingredients in bulk at a cheaper price has boosted the company's profit margins. And its capital-light franchise business model has allowed McDonald's to reach its currently massive size and scale.
Based on expectation that these factors will continue, analysts believe the company will be able to generate 7.2% annual earnings growth over the next five years. Considering that McDonald's 2.4% dividend yield is higher than the S&P 500 index's 1.7%, this is an attractive level of growth.
And since the company's dividend payout ratio sits at 57%, investors can sleep well at night knowing that the dividend is covered by its cash flow. Investors can scoop up shares of McDonald's at a forward price-to-earnings (P/E) ratio of 22. For context, this is just below the restaurant industry average forward P/E ratio of 22.7. Given the company's track record as a Dividend Aristocrat with 45 years of dividend hikes to its credit, a slight discount makes it an interesting buy.
2. Home Depot
When Bernie Marcus and Arthur Blank opened the first two Home Depot stores in 1979 in Atlanta, Georgia, they were the first of their kind in the home improvement retail industry. At 60,000 square feet each, the stores were significantly larger than the competition.
That's what allowed the company to stock a mind-boggling 25,000 products for its customers. Coupled with the know-how and helpfulness of employees, this led the pioneering company to become the largest home improvement retailer in the world with 2,300 stores throughout North America.
Prospects for the home improvement retail industry are inextricably tied to the real estate market in North America. With a global recession seemingly looking more likely by the day and soaring interest rates, Home Depot's growth will likely slow to the mid single digits this year and next. But since the dream of home ownership should remain intact for the long haul, analysts are projecting 15.7% annual earnings growth through the next five years.
Like McDonald's, Home Depot offers a market-topping 2.7% dividend yield. And the dividend payout ratio is under 46% for the current fiscal year. This builds in plenty of room to open more stores and grow the dividend further for many more years.
Investors can purchase shares of Home Depot at a forward P/E ratio of 16.4, which is only a bit above the home improvement retail industry average of 15.4. This is hardly an unreasonable valuation to pay for a company that sits atop a nearly trillion-dollar industry.