Nothing beats waking up to some extra cash in your investment account. Dividends are one of the few ways regular people can earn passive income in today's economy. And over time, they can help set the foundation for a successful retirement. Let's discuss why Phillip Morris International (PM -2.54%) and McDonald's (MCD -0.09%) are two stocks that could add sustainable income to your investment portfolio.
1. Phillip Morris International
When it comes to dividend investing, stability is key. And if you are looking for a company that can maintain its profitability, look no further than Phillip Morris International. This tobacco giant boasts a solid moat. And its pivot to reduced-risk nicotine products could add another layer of safety and diversification to its business model.
Tobacco is an addictive product, so its consumers tend to buy it no matter what is going on in the economy. Phillip Morris also enjoys geographic diversification. No one region of the world makes up more than 30% of its total shipment volume, shielding the company from regulatory challenges in any particular jurisdiction.
In 2022, management completed the much-anticipated acquisition of Swedish Match, which specializes in oral tobacco products. The deal will give Phillip Morris access to successful products like Zyn nicotine pouches and unlock distribution synergies for Phillip Morris' other reduced-risk products in the U.S.
With a price-to-earnings (P/E) multiple of 15, Phillip Morris stock is cheaper than the S&P 500 average of 22. And the company's dividend yield of 5.15% may not stay this high for long.
2. McDonald's
Investing is all about balancing risk and reward, and few companies are better suited to this task than McDonald's. This blue chip giant boasts almost seven decades of success in the fast-food industry and has one of the strongest economic moats in the world. It can also return value to investors in good or bad economic conditions.
The term "economic moat" was created by legendary investor Warren Buffett to describe a company's ability to maintain a sustainable competitive advantage over peers. For McDonald's, this comes down to its brand recognition and scale. With more than 38,000 stores in over 100 countries, it is the world's largest and most recognizable fast-food chain. The company is also somewhat recession-proof because of its lower-priced food options and unique business model.
Image source: Getty Images.
Instead of being just a fast-food chain, McDonald's is also one of the world's biggest real-estate companies. Around 85% of its restaurants are owned by franchisees who rent their stores from McDonald's, giving the company a layer of protection against fluctuations in consumer demand.
With a price-to-earnings (P/E) multiple of 27, McDonald's stock is more expensive than the market average. But the premium looks justified considering its safety and track record of success. Management sweetens the deal with a dividend yielding 2.14%. And the payout has been raised for 21 years in a row.
The importance of diversification
As with all types of investing, diversification is key for dividend stocks. This simple technique allows an investor to target their desired yield while minimizing the risk of any particular stock going wrong. Phillip Morris and McDonald's would both make excellent picks in a diversified portfolio.
