Has your search for a new income-generating holding led you to McDonald's (MCD -1.52%) yet? Its forward-looking dividend yield of 2.9% is certainly respectable enough, although there's no denying you could find better.
Nevertheless, if your portfolio needs more reliable cash flow or if you're just looking for a bargain, stepping into a long-term position in this fast-food restaurant chain's stock while it's down 24% from its February peak could be a brilliant decision.
Here are the three biggest reasons why.
Image source: Getty Images.
1. Its business is resilient
Despite this year's disappointing sales growth that caused the pullback from February's high, the fast-food restaurant business, and McDonald's in particular, are resilient. People always need to eat, and always need convenient value. With an industry-leading 46,028 locations peppered all over the planet, McDonald's is usually people's first and best option.
NYSE: MCD
Key Data Points
It's also worth adding that this year's sales headwind isn't anything the company hasn't faced before, and either navigated around or pushed through. That's not apt to be different this time around.
As CFO Ian Borden believably commented during the second-quarter earnings conference call: "We're acting with urgency to improve our baseline guest traffic and put the U.S. business in a stronger position as we exit 2026."
2. The company can consistently fund its dividend payment (and its growth)
Most investors understand that McDonald's is a franchise. What most investors may not fully appreciate is how this franchise is so different from almost any other.
The organization's top profit center isn't selling food. It's not even royalties for the use of its well-known brand name. It's rent. McDonald's owns most of the buildings its franchisees operate out of -- and charges them ever-rising market-based rent rates regardless of how well that location is performing -- so the parent company's cash flow is secured.
If you want specific numbers, about 95% of the chain's restaurants are franchises. While more than 60% of the total revenue the company collected from these operators year to date is rent, less than 40% of it is royalty payments.
3. It's on the verge of becoming a Dividend King
Finally, as was noted, this company's per-share dividend has grown every year since 1976. It hasn't announced its next consecutive payment increase, but it usually makes this announcement in October. Look for the next one to be made next month.
The upcoming announcement will be different than all the others up until this point, however. The next one will mark the 50th consecutive annual dividend payment growth, the milestone that will officially qualify McDonald's as a Dividend King. Although this technically doesn't change anything about the stock's value, it does take its stature as an income investment up a notch, bolstering the ticker's perceived value.
