If there’s one thing that 2022 has shown investors so far, it’s the importance of having a diversified portfolio that provides balance during rocky market periods. Whether you’re looking for a way to protect your portfolio against inflation or keen to protect against volatility, dividend aristocrats are a rare group of companies that have withstood the trials and tribulations of previous economic swings.
A dividend aristocrat is a company that, over the past quarter century, has consistently raised its dividend payout.
In recent years, growth stocks have overshadowed dividend stocks. But the tide may be shifting towards allocating a chunk of your portfolio to more stable, mature companies.
A dividend stock to add to your portfolio watchlist is McDonald’s (MCD). Here’s why this well-known company should be on your shortlist.
McDonald’s Is a Dividend Aristocrat to Consider
As mentioned, a “Dividend Aristocrat” is a company in the S&P 500 index that has not only paid its investors for at least 25 consecutive years but has increased its base dividend each year. So, if you’re interested in adding a dividend stock or two to your portfolio, it’s ideal to start with these companies.
McDonald’s (MCD) offers two ways to earn: share appreciation and dividend payments. This strategy helps you build passive income while reducing overall volatility and risk.
Since Mcdonald’s was first founded in 1955, it has continued to grow, generating the earnings and free cash flow needed to increase its dividend payouts, and 2021 was no different. Thanks to the franchise’s MyMcDonald’s loyalty program, the fast-food giant had a great year and is now trading at a slight discount relative to its industry.
A Closer Look at McDonald’s Revenue and Earnings Growth
McDonald’s Q4 and full-year report showed that the company reported impressive growth in 2021, despite missing estimates. Sales grew by 21% for the year, surpassing $112 billion globally, and digital sales exceeded $18 billion, accounting for 25% of total sales in the company’s top six markets. The year presented continued challenges. However, McDonald’s plans to harness its momentum to drive long-term, sustainable growth for stakeholders.
The non-GAAP diluted earnings per share (EPS) was 53.4% higher year over year, reaching $9.28 per share for the fourth quarter. This increase resulted after McDonald’s opened over 650 new restaurants throughout the year. More stores contributed to the rise in systemwide sales.
The McDonald’s loyalty program was a significant driver of the company’s increase in sales. First launching in the United States in July 2021, this program has attracted millions of members. As of February 2022, the MyMcDonald’s program has approximately 30 million enrolled members, 21 million who are active members, resulting in a 10% increase in digital customer frequency.
This program shows that high customer engagement and repeat business support McDonald’s growth and bottom line. Rollouts are scheduled in other areas globally, such as Australia and the United Kingdom, so sales and customer engagement rates are expected to grow further.
A Dividend You Can Count On
Since McDonald’s is a Dividend Aristocrat, it already has the proven history that income investors seek. In fact, McDonald’s has paid a growing dividend for 46 years and is poised to continue this streak for years to come. McDonald’s is positioned well for future dividend growth thanks to a healthy balance sheet.
While focusing on adding new stores, McDonald’s business model isn’t overly capital-intensive. Independent store owners pay the capital necessary to open their McDonald’s location and become franchisees. This model supports McDonald’s available capital, continued growth, and ability to grow its current 2.2% dividend.
Is Now the Time to Buy MCD?
McDonald’s has been an outstanding dividend stock for the past few decades, but what about the company’s valuation?
Comparing McDonald’s forward price-to-earnings ratio of 22.8 to the restaurant average of 23.8, it appears that McDonald’s is somewhat undervalued.
Like many stocks, MCD has been affected by the real effects of inflation over the past few months. However, the outlook for this industry leader is brighter than its rivals based on its operating margins.
Currently operating at a nearly 42% margin (by contrast, Restaurant Brands International Inc operating margin is 33.51%), McDonald’s plans to widen this gap over the next few years by raising prices, focusing on a slimmer menu, and prioritizing more efficient selling operations.
Looking at the past year alone, McDonald’s stock increased by nearly 20%, and over five years, MCD has risen by over 96%. With such a history of steady growth it’s hard to bet on a significant pullback offering a better opportunity than right now, which is as good a time as any to invest in this fast-food titan, especially when considering the company’s attractive dividend yield.
Bottom line: McDonald’s is positioned to yield strong growth for years to come, offers a solid dividend yield, and has a history of prospering in all economic environments. It’s one dividend aristocrat to add to your shortlist.