As investors transition to a new year, many may be adding cash to traditional or Roth IRA plans. Often, such contributions find their way into index funds that offer diversification and a long growth history.
But for those who are interested in individual stocks, conservative investments that can produce a rising source of income and potential stock price growth may be the best way to go. In the consumer sector, both Realty Income (O -0.17%) and McDonald's (MCD -0.91%) could serve this purpose. Here's why.
Realty Income
Realty Income is a real estate investment trust (REIT) that owns more than 13,000 properties in the U.S. and four European countries. It has single tenants under long-term, net lease agreements. This means the tenant pays the properties' maintenance, taxes, and insurance, leaving Realty Income to profit from the rental income.
Investors may know Realty Income for the buildings it owns rather than as a company. Its client list includes retailers of all types, restaurants, and specialized businesses, such as auto repair shops or fitness centers. Walgreens, Dollar General, and Tractor Supply are examples of companies leasing space from Realty Income.
Retirement investors will also like that it bills itself as the "monthly dividend company," backing that up with monthly payouts. The current annual dividend is almost $3.08 per share, which amounts to a dividend yield of 5.4%. Also, with four payout hikes in 2023 alone, its appeal as an income stock should continue to grow.
In the first nine months of 2023, revenue totaled $3 billion, an increase of 22%. Unfortunately, interest costs hit the bottom line though the company still generated $2.1 billion in funds from operations (FFO) income, a measure of a REIT's free cash flow (FCF). This fully covers about $1.6 billion in dividend costs over that period.
Admittedly, the stock is off slightly for the year due to the aforementioned rising interest rates. Still, that leaves Realty Income with a price-to-earnings (P/E) ratio of 43. Due to high depreciation costs, this earnings multiple may appear high but is actually at a low level historically. Now, with interest rates again on the decline, the stock and its dividend are likely to head higher in 2024.
McDonald's
Investors and consumers alike know McDonald's for its iconic fast-food hamburger restaurants found in almost any town in the U.S. and more than 100 countries worldwide. Nonetheless, when looking at its business model, it seems to have more in common with a REIT than a restaurant. The company derives most profits from franchise-related fees and rental income because it owns the restaurant properties.
Indeed, it owns a small proportion of its restaurants. Since it collects a 4% fee (5% for new franchises, beginning Jan. 1) on revenue from its franchises, it has some exposure to the overall economy. However, deriving most of its income from rent and franchising fees limits the negative effects of downturns.
Additionally, the company is testing a beverage chain concept called CosMc's. While it is still early going, the hours-long lines point to CosMc's potential success. This could pave the way for a new round of franchising that could stoke additional growth.
Indeed, the company has prospered even without CosMc's. In the first nine months of 2023, revenue of $19 billion rose 10% versus the same period in 2022. The 9% growth in global comparable sales drove the majority of that increase. Also, net income of $6.4 billion was up an astounding 50% as operating expenses shrunk year over year.
So far, such gains have not appeared in the stock price as it has only risen by just under 10% over the last year. However, its annual dividend of $6.68 per share yields an additional 2.1%.
The dividend has risen every year since 1976 and should serve as a continually rising source of income. Also, with $5.5 billion in FCF for the first nine months of the year financing the $3.3 billion in dividend costs, income investors should feel safe with this stock.
Finally, its P/E of 26 is in line with historical averages and may appear cheap, given the recent profit increases on the existing business. If CosMc's becomes its next major franchising operation, that could become a significant catalyst that bolsters McDonald's stock and its dividend for years to come.
