The Motley Fool: Fast food and rising dividends

The Fool’s Take

McDonald’s boasted over 44,000 restaurants in more than 100 countries as of June 30 — with about 95% of its locations operating under franchises. It has several arrangements, but generally, the franchisee pays McDonald’s a royalty based on a percentage of sales. McDonald’s also collects rent for properties it owns.

These agreements mean that McDonald’s doesn’t invest much capital to maintain restaurants, helping it maximize free cash flow (FCF). That’s an important consideration for dividend-seeking investors. The company generated $3.1 billion in FCF during the first half of the year, compared with $2.5 billion in dividends.

McDonald’s remains firmly committed to dividends, too. Nearly a year ago, the board of directors raised quarterly dividends by 6% to $1.77, making 48 straight years of increased payments. The stock’s recent 2.3% dividend yield bests the S&P 500 index’s 1.2%. Value-priced meals are front and center on the fast-food leader’s menu, and increasingly price-sensitive diners are responding in kind. In the second quarter, revenue increased 5% year over year.

While value is fueling sales growth, technology is enabling the restaurant chain to cut costs. McDonald’s intends to ramp up investments in AI to improve order accuracy, minimize equipment downtime and streamline administrative tasks for managers. Investors seeking long-term income may want to consider McDonald’s.

Ask The Fool

From K.L., Meridian, Idaho: Is it smarter to buy stocks of young companies trading for less than $20 per share or higher-priced stocks, such as Mastercard (recently near $585 per share), that are more established and have good track records? I would think it’s better to buy a lot more shares in lower-priced stocks to make more money.

A stock’s price per share doesn’t mean what you probably think it does. (Stocks trading for less than around $5 per share are “penny stocks,” though, and can be extra risky.) Mature companies can have low share prices; AT&T stock, for example, was recently near $30 per share. And younger ones can have high share prices: Netflix shares were recently over $1,200 apiece.

It’s important to answer two separate questions: Is this a high-quality company with competitive advantages, a healthy balance sheet (little debt, plenty of cash), and great growth prospects? And is its stock price attractive?

Assessing a stock’s valuation can be tricky, but you might start with a simple price-to-earnings (P/E) ratio. A $20 stock may be overvalued and likely to fall, while a $500 stock may be a great bargain, destined to hit $1,000 in a few years and $2,000 after that.

The number of shares you buy doesn’t matter much, either — you can double or triple your investment whether you buy three shares or 300 shares.

From B.I., Greenwood, S.C.: I’ve read that someone is “long” a stock. What does that mean?

It means they’ve invested in the usual way, by buying shares and expecting them to increase in value. This is in contrast to being “short” a stock, meaning the aim is to profit if the stock’s price falls.

The Fool’s School

Here’s a scary statistic, from Fidelity: “A 65-year-old individual may need $172,500 in after-tax savings to cover health care expenses in retirement.” Yikes! To keep health care costs under control as much as possible, we need to be smart about Medicare — and to make some other savvy moves as well.

Medicare is available beginning at age 65, and it’s vital to sign up on time — within the three months before and after the month of your 65th birthday. (If you or your spouse are still working then, you may be able to delay.) Signing up late generally results in heftier monthly premiums for the rest of your life.

There are two main options when it’s time to sign up for Medicare. You can opt for “original” Medicare, consisting of Part A and Part B, which respectively cover hospital and medical services. You’ll also likely want Part D (prescription drug coverage) and/or a supplemental Medigap plan.

Study the plans available to you, and choose whichever will serve you best. (Note, too, that if you don’t sign up for a Medigap and/or a Part D plan initially, you may have trouble doing so later.)

There are some resources out there to help seniors make Medicare decisions — a little online digging can turn them up. As an alternative to original Medicare, you might opt for a Medicare Advantage plan (sometimes referred to as “Part C”). We’ll cover Medicare Advantage plans next week.

Whether you choose original Medicare or a Medicare Advantage plan, your Medicare coverage includes a free annual wellness visit, so be sure to schedule that. Multiple important screenings are also free — including colonoscopies and mammograms, and screenings for prostate cancer, heart disease, depression, diabetes, hepatitis, alcohol use, HIV, sexually transmitted infections and osteoporosis.

Take advantage of all the preventive care you can, because any problems found early can usually be treated less expensively, perhaps even extending your life. Getting and staying healthy — perhaps by exercising, losing weight and eating more nutritious meals — is another way to aim to shrink your health care costs.

My Smartest Investment

From M.L., Syracuse, N.Y.: My smartest investment was buying 10 shares of Google (now called Alphabet) at its initial public offering (IPO) in 2004.

After two stock splits, in 2014 and 2022, one of which introduced a new class of shares, I ended up with 200 shares of each of the two classes (actually, a bit more due to reinvesting dividends).

I’ll never be rich, but I do have a stake in the company worth nearly $100,000 — a substantial part of my small portfolio.

The Fool responds: Well done! It can be risky buying into a stock right when it debuts on the market, as shares can initially soar beyond reason due to market excitement. (It’s often best to wait for up to a year to let the dust settle.)

But by hanging on for the long haul, you weathered lots of ups and downs. That 2014 split was a bit controversial, as it introduced a class of shares without voting rights, thereby keeping more control over the company in the hands of its founders.

The new name “Alphabet” reflects multiple businesses under the same roof — including the Google search engine and Cloud platform. the Google Cloud platform, Android, FitBit, Nest Labs and YouTube. Alphabet’s market value recently topped $3 trillion.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)

Who Am I?

I trace my roots to multiple early aviation businesses — including Robertson Aircraft, whose chief pilot in the 1920s was a guy named Charles Lindbergh.

In 1936, I was the first airline to offer commercial service between New York and Chicago on Douglas DC-3s. In 1940, I was the first to debut an airport lounge for my passengers.

Today, with a recent market value of $8.3 billion, I boast a fleet of 900-plus aircraft and thousands of flights daily to more than 350 destinations. I employ around 130,000 people. I merged with US Airways in 2013.

Who am I?

Forget last week’s question? Find it here.

Last week’s answer: IKEA