Investors rarely think of restaurant and food stocks as insulated from economic turmoil. However, several companies in this sector pay good dividends and will remain successful if the global economy hits another bump in the road.
Let's take a look at which food stocks may be able to protect your portfolio.
H.J. Heinz (NYSE: HNZ) is an extremely well-known brand with an established presence in first-world economies and a growing influence in emerging markets, having recently expanded its international presence through acquisitions in both China and Brazil.
On top of that, the company pays nearly a 4% dividend, second-highest of the companies considered in the chart below:
Source: Author's calculations.
We can see that ConAgra (NYSE: CAG) edges Heinz when judged by virtue of its dividend yield alone, but does that make it a better buy?
Not exactly. While ConAgra owns Hunt's, Heinz's main competitor in the ketchup market, it lags Heinz in several key metrics. Notably, ConAgra has a much lower profit margin (3.5% vs. 7.9%) and a higher payout ratio than Heinz (around 85% vs. 67%), as Fool contributor Max Macaluso has shown us.
The payout ratio is important. It's the percentage of a company's net income that's paid out in the form of dividends each year. If this number is high -- like ConAgra's -- it could signify that the company has an unsustainable dividend. And if there's one thing I hate with every ounce of my soul -- besides cauliflower -- it's unsustainable dividends.
Let's re-examine the dividends of the same five companies from the chart above, but with an eye on their payout ratios as well:
Source: Finviz.
Suddenly, we have a different perspective on ConAgra's high yield. With a payout ratio near 90%, we have to wonder if ConAgra needs to hit the brakes on dividend hikes. It should, unless it wants me as its fiery archnemesis.
Kraft (Nasdaq: KFT) is another direct competitor to Heinz. It makes a variety of packaged food products like condiments, confectionary products, and prepackaged meals. We can see that it pays nearly a 3% dividend while maintaining a payout ratio around 60%, which is lower than both Heinz and ConAgra.
The last two companies in the charts are Yum! Brands (NYSE: YUM) -- which owns fast-food brands like KFC, Pizza Hut, and Taco Bell -- and McDonald's (NYSE: MCD). Mickey D's is by far the largest and best-known company of the five, with a market cap $16 billion higher than the next largest. This is reflected in the company's low payout ratio and respectable dividend; McDonald's is wildly profitable, but it still reinvests most of its money back in its business directly.
Yum! Brands, however, is easily the most growth-oriented company in the quintet. The draw for most investors with this stock is not the dividend -- 1.8% isn't anything to write home about -- but the possibility for future expansion in China, where it has focused much of its efforts in recent years.
While high dividend yields may look attractive at first glance, they can be misleading if they are unsustainable or not the best use of capital. We've seen that most of the companies mentioned in this article understand this and have sustainable payouts, but we'll want to keep an eye on that ratio going forward just in case they take a nasty turn for the worse.
There's a lot of money to be made in dividends, especially for long-term investors. Needless to say, the food industry isn't the only sector where quality income stocks can be found. Our free report "The 3 Dow Stocks Dividend Investors Need" examines three household companies that pay great, sustainable dividends. Get your free report here today.
