In the past, a good portion of equity investing was about dividends -- that nice chunk of cash public companies return to investors every quarter. A focus on tangible income helped keep stock valuations grounded and gave investors an enhanced sense of ownership in a business. You essentially got a cut of profits, which is incredible when you think about it.
According to The Wall Street Journal, dividends started losing their popularity in the 1980s and 1990s. Investors started prioritizing growth, and companies began retaining more earnings to generate capital appreciation. That said, large blue chip stocks like McDonald's (MCD -1.93%) have maintained the dividend-paying tradition. Let's dig deeper into how many shares you need to receive $5,000 each year.
McDonald's is more than just a dividend stock
Dividend-paying stocks are not all alike. McDonald's stands out because of its incredible track record. Since starting its annual distribution in 1976, the company has increased its payment annually for 49 years in a row, which makes the stock a member of the Dividend Aristocrats® family.
While investors tend to pay closer attention to yield, over the long term, dividend growth can be even more important. According to calculations from business media company Kiplinger, McDonald's dividend has grown at a compound annual growth rate (CAGR) of 7% over the last 10 years and 14% in the previous 20 years.
At that rate of growth, the payout would double every five years. This represents serious wealth creation potential, especially in a tax-advantaged account such as a Roth IRA.
Despite consistently increasing its dividend, McDonald's maintains ample coverage with a payout ratio of 61%. This metric measures the amount of earnings paid out as dividends, and it indicates that McDonald's has plenty of room for continued dividend growth for years into the future.
A stable and resilient business
While long-term investing is the key to sustainable stock market returns, it also introduces its fair share of risk. The vast majority of public companies that existed when McDonald's went public are no longer around. According to a study by McKinsey, the average S&P 500 company exists for just 18 years, due to changing consumer tastes, technological disruption, or simple mismanagement. When building a dividend portfolio, it's essential to bet on businesses that can stand the test of time.
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On the surface, McDonald's may seem particularly vulnerable. Consumer food preferences tend to evolve over time as people become more health-conscious or simply move on to newer options. That said, McDonald's has historically managed to overcome these challenges.
Unlike a pure-play restaurant stock, the company's franchise model shifts significant operational risk and costs to the franchise owners while ensuring high-margin recurring revenue from royalty fees. It also benefits from a vast and expanding real estate portfolio, often in prime locations around the world. This helps shield the company from macroeconomic challenges like inflation, which can hurt individual franchise locations.
Investors shouldn't expect McDonald's earnings to grow every year. Still, over the long term, the company looks positioned to maintain relatively slow but steady growth, which will help fund its dividend.
So, how many shares do you need for $5,000 in dividends?
McDonald's stock currently offers a forward dividend of $7.08 per share, which comes out to a dividend yield of 2.46%. You would need 706 shares to get $5,000 per year, which would cost just over $203,000.
To be fair, that's a lot of money, and you probably shouldn't put it all in one place. However, McDonald's stock would make a great addition to a diversified income-focused portfolio because of its track record of dividend sustainability and its resilient business model.
