Many of us dream of becoming millionaires by our investing prowess. Often, these dreams are of getting rich quickly without doing anything other than purchasing a lottery ticket, or buying a highly speculative stock hoping for the next home run. Purchasing speculative stocks too often will cause your losses to be greater than your gains. To avoid this, investors would be better off investing in a proven dividend paying company that grows earnings consistently over the long-term.
There is something to be said about growing wealth steadily and consistently. With investing, consistency in earnings growth drives consistency in stock prices. McDonald's (MCD) is one of those companies that grow earnings consistently. It has also increased its dividend every year since 1976. The combination of stock growth and dividends can add up significantly over time when the dividends are reinvested.
Adjusted for stock splits, MCD stock has increased by over 18,000% since the early 1970s, going from an adjusted 0.56 in January 1972 to the 2012 high of $102. This gain is approximately equivalent to a CAGR (compound annual growth rate) of 14% per year.
MCD stock has pulled back to about $92 since hitting its high, so I think that now is a great time to get into the stock for the long-term. The stock is fairly valued with a forward PE ratio of 14.74, a PEG of 1.63, and a price to book ratio of 6.37. This is the type of stock that remains fairly valued as the stock price grows in line with earnings over time. I wouldn't expect the stock to become undervalued unless management repeats its poor performance of 2002. However, I think that important lessons were learned from that time period and those mistakes will most likely not happen again.
The new CEO, Don Thompson, has been with the company for 22 years and knows the business. I'm confident that he will make the transition to CEO a seamless one for McDonald's' employees, customers, and shareholders.
So, how do you become a millionaire by investing in McDonald's? By investing in the stock and reinvesting the dividends you will take advantage of the power of compounding. I'm going to use a more conservative CAGR of 13% -- which includes a 3% dividend plus 10% annual stock appreciation. If an investor were to invest $26,000 in MCD today, he / she will reach the million mark in about 30 years.
Not everyone has $26,000 to invest in one stock. An investment of $5000 will grow to about $17,000 in 10 years, $57,000 in 20 years, and $195,000 in 30 years. Not too shabby.
Here's another example: Initially invest $5000, but then make an annual contribution of $1000 to purchase more stock and continue to reinvest the dividends. In this scenario you will have $34,000 in 10 years, $137,000 in 20 years, and you will reach the $1 million mark in the 36th year.
McDonald's has a proven track record over time. The economies of scale that it has earned over the years provide the company with many competitive advantages. These advantages will allow McDonald's to continue its growth throughout the world and allow it to continue to outperform the market.