Staying true to my intense investing psychological training, these recent market drops have gotten me excited. Unfortunately, I reinvested all the free cash in my account a few weeks ago, but for everyone else, there are some great opportunities available. This is especially true for dividend growth investors, like myself, who can use this opportunity to lock in a high dividend yield on some of my favorite blue chips. I will be discussing McDonald's (MCD) and Chevron (CVX), both of which had some recent bad news, further driving the price down in addition to the overall market drop.
McDonald's shares have been dropping recently as a result of sagging sales. The news shouldn't be ignored, but it definitely isn't the end of the company. McDonald's had been dominating some of its closest rivals, Burger King (BKC) and Wendy's (WEN), which are now starting to slowly revive. This could be contributing to the slight slowdown in sales, along with more successful competition such as Yum! Brands (YUM) and the rise in casual fast food establishments such as Chipotle (CMG) and Panera (PNRA). One of the great things about McDonald's however, and the main reason I have a large position in my portfolio, is that they excel at adapting to the market demand. It's why Burger King and Wendy's are in the position they're in right now. While they stayed stagnant, McDonald's was constantly updating its menu to serve what the customer wanted.
They might have one or two more bad quarters up their sleeves so I can't recommend them for a short term investment, but if you're looking for a long term dividend growth company, it'll be hard to do better than MCD. At their current low of under $85 per share, they're offering a 3.6% dividend yield. From 2002 through 2011, the average dividend growth rate was about 31%. Even if it slows to the more recent levels of just over 10%, this pretty good for a company stable company with a relatively large yield. The best part is that when sales return, so will the dividend growth rate. Keep in mind that the most recent dividend hike, from $0.70/share to $0.77/share hasn't been paid out yet so there's still about a year until we see if the dividend growth rate will actually be affected by slowing sales. For a good analysis on the projected dividend yield, I recommend reading this article by Tradevestor.
The second company I'd like to look at is Chevron. The situation with them is a little more intense than McDonald's. I could explain some of the issues, but Trade In Mexico already did a great job doing so. To summarize, Chevron is facing market volatility due to the global economy (but who isn't?), $41 billion in lawsuits and a potentially larger drop in oil prices than they have already experienced. The thing that makes me not too worried about these issues is that they're temporary. No one can predict what the global economy will be like ten years down the road, but if they're not better than they are now, investors will be having more issues than just Chevron. The lawsuits, if lost by Chevron, will incur significant damage, but again, these are one time losses. Just pray that Chevron learns from their mistakes. As for oil prices, historically they tend to go up. I don't know if they'll drop to $70/barrel over the course of the next year, but I highly doubt they'll be under where they are now several years down the road.
For the short term I believe there's a lot more unknown with Chevron than McDonald's, meaning the price could continue to drop. If I had the money, I'd initiate a small position now for that 3.4% dividend yield, or sell some put options to either get some free money or lock in an even better share price and yield. Depending on what kind of money you're playing around with, the non-option route gives more freedom to get some shares now and still be able to afford a shares later at a lower price, while selling puts will tie up around $10,000 per contract. Whether or not the price continues to sink, however, it's still a great dividend.
If you can stick to the buy low, sell high strategy, which for some reason is against human nature, the market is offering great prices on McDonald's and Chevron. I can't predict where the share prices will go from here, but their dividends offset the risk of this uncertainty, making them both buys in my book.
Please leave comments below! I look forward to reading your opinions on these companies and what you think of their current prices. Thanks for reading!