The fast-food industry is a fruitful hunting ground for dividend investors, as many of these companies are strong, well-established businesses with resilient earnings that can weather difficult economic environments.
Restaurant Brands International (QSR 1.14%) and Yum! Brands (YUM 0.58%) are among the top five largest restaurant operators worldwide, and operate diversified portfolios of restaurant concepts. They operate franchise-based business models that allow them to collect upfront franchise fees from new franchise owners as well as recurring royalty payments based on franchise revenue.
Both of these dividend payers are solid choices for dividend-growth investors and dividend investors in general. But which of these fast-food empires is the better buy for dividend investors going forward?
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Meet the contestants
As a brief introduction, both Yum! Brands and Restaurant Brands operate diversified portfolios of restaurant concepts worldwide. Interestingly, they both feature three well-established, well-known concepts along with a newer and smaller recent addition to their lineups.
For Restaurant Brands, Burger King, Tim Hortons, and Popeyes Louisiana Kitchen are the mainstays, and Firehouse Subs is the newcomer in its portfolio. For Yum! Brands, KFC (Kentucky Fried Chicken), Pizza Hut, and Taco Bell are the stalwarts, and Habit Burger is the new addition to the roster.
Restaurant Brands currently operates about 29,000 locations across 100 countries worldwide, while Yum! Brands is nearly twice its size, with more than 53,000 restaurants in 155 countries.
Dividend growth at the drive-thru
Yum! Brands has been a solid dividend stock over the years. The company has paid a dividend every year since 2004 and increased its annual dividend payment every year except for one since 2004. With an annualized dividend of $2.28 in 2022, the company now pays out more than double what it paid in 2014.
Meanwhile, Restaurant Brands has been steadily increasing its dividend payment since 2014, when it came into its current incarnation via a merger between Burger King and Tim Hortons. The company's annualized dividend of $2.16 this year is now nearly five times higher than its annual payment of $0.44 in 2014. More recently, Yum! Brands' dividend growth has outpaced Restaurant Brands' dividend growth over the past five years, as the dividend has grown 58% since 2018, from $1.44 per share annually to $2.28 per share. Meanwhile, Restaurant Brands has increased its payout from $1.80 to $2.16, equating to 20% growth over the same time frame.
Restaurant Brands CEO José Cil has spoken of the company's commitment to continuing to grow the dividend and has said that management wants to grow the dividend to $1 per quarter over time, which would be a substantial increase from today's levels. Restaurant Brands' share price would likely increase as the company moves toward this goal, but a dividend of $1 per quarter per share right now would add up to a yield of about 6%.
A decade of dividends
While these are both good dividend growth stocks, Restaurant Brands' dividend yield is superior, with a yield of 3.2% versus a yield of 1.8% for Yum! Brands. All else being equal, assuming both companies maintained their current dividend payouts for the next decade and that the share prices remained static, an investor investing $10,000 into shares of Restaurant Brands today and reinvesting the dividends could expect to receive about $3,795 in annual dividend payments over the course of the next decade, versus $1,979 for a holder of Yum! Brands.
In reality, both stocks will fluctuate in price over that time span, and both will likely continue to raise their dividends (making these returns even better in reality), but this shows how big of a difference this 1.4% higher yield can make over time.
Both of these dividends look reasonably safe from a dividend payout ratio perspective with Yum! Brands holding the edge. Yum! Brands has a dividend payout ratio of 52%, while Restaurant Brands has a payout ratio of 70%.
And the winner is...
Restaurant Brands and Yum! Brands will both likely continue to be long-term winners and stocks that continue to grow their dividends over time, so there is a lot to like about both of these stocks.
Yum! Brands has grown its dividend at a faster rate than Restaurant Brands over the past five years. On the other hand, Restaurant Brands has had a substantially higher yield and a higher rate of dividend growth since going public, making it the better dividend stock, in my view.
Yum! Brands enjoys a slightly higher valuation than Restaurant Brands. Yum! Brands trades at a price-to-earnings multiple of 29 times earnings and 25 times forward earnings versus about 22 times earnings and 22 times forward earnings for Restaurant Brands. While this isn't a huge gulf in valuations, Restaurant Brands' valuation is a bit more palatable and leaves some more room for upside on the table for investors, further solidifying its place as the winner in this contest.
