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On Friday March 22nd, two of the larger-cap firms in the restaurant sector announced the regular distribution of their respected quarterly dividends. In this article I wanted to examine both companies and demonstrate why I think both should be considered a viable investment option for those looking to supplement their current streams of income.

Yum! Brands, Inc. (NYSE:YUM): Based in Louisville, Kentucky, and together with its subsidiaries, operates quick service restaurants in the United States and internationally. It operates in six segments: YUM Restaurants China, YUM Restaurants International, Taco Bell U.S., KFC U.S., Pizza Hut U.S., and YUM Restaurants India. (Yahoo! Finance) Shares of Yum! Brands carry a P/E ratio of 20.62 (which places the stock right on the cusp of being considered inexpensive), a PEG ratio of 1.76, and a yield of 1.92% ($1.34).


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There are two things to consider when it comes to Yum! Brands and they are the company's recent month-over-month improvement in Chinese same-store sales and the company's dividend behavior since July 2008.

Improving Sales in The Wake of Chinese Adversity: According to Augustino Fontevecchia of Forbes, "Although, Yum has taken a hit in China, after regulators started a probe into allegedly high chemical levels in their raw chicken, February same -sales actually inched up 2% in China, on the back of flat numbers at KFC and a 13% surge in Pizza Hut, as Chinese consumers ramped up purchases around the Lunar New Year". The improvement in sales certainly gives shareholders much needed breathing room as the government probe by China has sent same-store sales down a very unfavorable path. If the company can continue to demonstrate strong regional growth especially when it comes to same-store sales, I see no reason why positions should not be established at present levels.

Steady Dividend Growth since July 2008: Since July 9, 2008, YUM has increased its dividend a total of four times by an average of $0.03625 per increase each time. The total increase equates to $0.145/share or 76.31% over that period. From an income perspective, the company's current yield of 1.92% coupled with its payout ratio (currently 35.63%) and its continued annual increases could equate into a very viable income option for long-term investors.

Darden Restaurants, Inc. (NYSE:DRI): Based in Orlando, Florida, DRI owns and operates full service restaurants in the United States and Canada. It operates restaurants under the Red Lobster, Olive Garden, Long Horn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V's Prime Seafood, and Wild Fish Seafood Grille brand names. (Yahoo! Finance) Shares of Darden Restaurants carry a P/E ratio of 14.14 (which makes the stock fairly inexpensive), a PEG ratio of 2.19, and a yield of 4.03% ($2.00).


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There are two things to consider when it comes to Darden Restaurants and they are the company's improvement in its year-over-year Q3 sales and the company's dividend behavior since July 2008.

Improving Q3 Sales: According to the company's earnings release, "Third quarter total sales from continuing operations of $2.26 billion represent an increase of 4.6% compared to the third quarter of last year. The increase reflects a same-restaurant sales increase of 2.3% for the Company's Specialty Restaurant Group, incremental sales from the acquisition of 40 Yard House restaurants on August 29, 2012 and the addition and operation of another 108 net new restaurants compared to the third quarter last year, offset by a combined same-restaurant sales decline of -4.6% for Olive Garden, Red Lobster and Long Horn Steakhouse". Although same-store sales at Darden Restaurants flagship properties were lackluster at best, I think shareholders need to seriously consider what the company is doing to make up for lost ground not only by reaffirming its 2013 outlook but by branching out and acquiring properties that could bode well over the next 12-24 months.

Steady Dividend Growth since April 2008: Since April 8th 2008 DRI has increased its dividend a total of five times by an average of $0.064 per increase each time. The total increase equates to $0.32/share or 177% over that period. From an income perspective, the company's current yield of 4.03% coupled with its payout ratio (currently 52.16%) and its continued annual increases could equate into a very viable income option for long-term investors.

Conclusion: The continued improvement of same-store sales for both YUM! Brands and Darden Restaurants is going to be something investors should play close attention to over the next 12-24 months, as such an improvement could significantly boost the earnings at both firms. If both firms happen to experience an improvement in earnings over the next 12-24 months, I wouldn't be surprised if we see continued increases in each company's annual dividend as well.

Source: 2 Restaurant Stocks With Considerable Dividend Growth Over The Last 5 Years