Fast food giant McDonald's Corp. isa highly regarded, almost legendary stock among dividend investors. It has raised its dividend each year since its first dividend payment in 1976. That streak amounts to 38 years of consecutive dividend increases, making McDonald's a member of the exclusive Dividend Aristocrats club, a list of companies that have raised their dividends for at least 25 years in a row.
And yet, for investors who focus solely on dividend growth, McDonald's may not be the best stock to buy right now. It offers a high yield, but McDonald's has had trouble raising its dividend at high rates over the past few years. This is a consequence of its slowing sales and profits, which mean dividend growth investors may want to look elsewhere for more rapidly growing dividend payouts.
A high yield isn't everything
McDonald's stock price has languished for a prolonged period. The stock is up just 5% in the past two years, well below the S&P 500 Index's 27% return in the same time frame. The good news for dividend investors is that this has kept McDonald's dividend yield high, since a stock price and its dividend yield move in opposite directions. McDonald's current 3.4% dividend yield is very attractive for income-seeking investors, especially considering the broader environment of low interest rates.
But McDonald's hasn't been able to grow its dividend much in recent years. Its last two annual dividend raises, in the fall of 2014 and 2013, were just 5% each, after averaging 15% compound annual dividend growth in the preceding five-year period.
The reason for this is that McDonald's profits are stuck in neutral. McDonald's diluted earnings per share are down 8% since 2011. For investors looking for more rapid dividend growth, new dividend payers Sonic Corporation (NASDAQ:SONC) and Jack in the Box (NASDAQ:JACK) look like better picks.
Dividend Aristocrats in the making?
If dividend growth is the goal, Sonic and Jack in the Box could be ideal picks. They don't offer the highest yields right now, yielding 1.2% and 1.4%, respectively, at recent prices, but they should make up for this with high growth in the years ahead.
Neither Sonic nor Jack in the Box has an established track record of dividend growth. Sonic has only paid a dividend for one year, and Jack in the Box for only slightly longer than that. But going forward, investors should easily expect double-digit dividend growth each year. Management teams at both companies have indicated their desire to raise dividends over time, which is easily warranted by their strong fundamentals.
Sonic grew comparable sales, which measure sales at restaurants open at least one year, by 6% last quarter. Consider that McDonald's comparable sales declined 2.3% last quarter. And, Sonic's earnings per share jumped 26% year-over-year. Going forward, Sonic management forecasts 27%-29% earnings growth this year. This growth will allow Sonic to continue aggressively growing its restaurant count in the United States. It will open 22-27 new franchised restaurants this quarter, and around 47 new restaurants for the full year. Sonic now has more than 3,500 drive-ins. McDonald's, on the other hand, reportedly will close more restaurants in the U.S. than it opens this year, which may impact its dividend growth, until its turnaround materializes.
Jack in the Box grew earnings per share by 17% last quarter, and 24% over the first three quarters of the year. Its earnings growth was fueled by high comparable sales growth at its two banners, Qdoba Mexican Grill and Jack in the Box. Same-restaurants sales are up 6.6% at Jack in the Box and 10% at Qdoba over the first three quarters, year over year. Earlier this year, Jack in the Box raised its dividend by 50%, which is a very promising sign of things to come.
Better dividend growth picks
McDonald's has an edge for investors who need income now, such as retirees, thanks to its higher dividend yield. But for investors with a longer time horizon, Sonic and Jack in the Box stand very good odds of surpassing McDonald's over time. Both Sonic and Jack in the Box are growing sales and profits, expanding restaurant counts, and their future dividend payouts should reflect this growth.
Bob Ciura owns shares of McDonald's. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.