Key insights
- The article highlights McDonald's as a dividend growth stock, emphasizing its real estate holdings and franchise model. While the company's consistent dividend growth may attract income-seeking investors, the article's impact on the broader US equity market is limited, primarily affecting MCD's stock price.
Does your portfolio need dividend income right now more than it needs growth? And for that matter, does it need durable dividend growth more than it needs a fantastic starting yield?
If the answer to both questions is yes, here's an idea for you: McDonald's (MCD +0.03%).
You know it as the planet's biggest fast-food chain, made up of more than 45,000 restaurants peppered across the world. And ostensibly, that's what it is.
If you dig deeper into the details, though, you'll see McDonald's is something else. It's also the world's biggest franchiser (as measured by revenue).
But even that's not the most curious and compelling aspect of this publicly traded outfit. What makes this name such an attractive income investment is the fact that it's ultimately a massive real estate operation. It just so happens that it rents out about 80% of its locations to franchised store operators that run 95% of its locations.
OK, that slightly downplays the partnership/relationship that this company's franchisees and the parent organization actually have. They all do work together, with McDonald's itself also receiving a percentage of the revenue each locale produces. Franchisees are also required to purchase supplies from the parent, although the parent offers them at a reasonable cost. McDonald's and its independent restaurateurs also typically share the cost of store remodels, and sometimes even advertising.
Franchisees' single-biggest monthly expense, however, is the rent they must pay to do business from real estate owned by the parent.
And this is where things can and do get a bit tense between the franchisor and its store operators. See, these rent payments are market-based, meaning they go up over time and must be paid regardless of how that particular location is performing.
Fair? Unfair? It depends who you ask. The argument that McDonald's is the most marketable brand name in the fast-food business, however, isn't insignificant. Although this particular arrangement may be unusual within the fast-food industry (where most franchisees own the building they operate from), being able to do business under the Golden Arches is a sizable advantage.
Perhaps more important to interested income-minded investors, this rental real estate-focused business model is a recipe for incredibly reliable dividend growth. It's upped its quarterly per-share payout for 49 consecutive years, in fact, leaving it one year away from becoming a Dividend King.
And it's raised it by more than a little. Last quarter's 5% improvement caps off a 10-year increase of nearly 100%, which translates into an annualized growth rate of just over 7%, handily outpacing inflation during this stretch.
No, you'll never achieve any great growth or capital appreciation as a McDonald's shareholder. That's just not the nature of this highly saturated business.
You're certainly likely to experience above-average dividend growth with a stake in the fast-food chain, though, starting out with a respectable forward-looking yield of just over 2.3%. That's not a bad entry point for a quality long-term holding like this one.