Current McDonald's (MCD) shareholders know how reliable the company's dividends are. McDonald's has raised its dividend every year since 1976. Recently, the company announced that it will raise its dividend by 10% for an annual payment of $3.08 per share for a yield of 3.4%. These payouts can be used to accumulate more shares or for income based on the goals of the investor.
Those who choose to reinvest the dividends can accumulate significant wealth over time. The combination of the 3.4% dividend yield and the 5- year annual expected earnings growth of 9.2% should allow dividend re-investors to double their money in about 6 years. In about nine to ten years, the investment should triple in value. This is the power of compounding.
If we look at actual figures, an initial investment of $10,000 should reasonably grow to be worth about $18,000 in five years and over $32,000 in ten years when dividends are reinvested to buy more shares.
For comparison's sake, let's see how an investor who doesn't reinvest dividends would fare. An investor putting $10,000 into MCD who did not reinvest dividends should have about $15,000 in five years and $24,000 in ten years. So, over a ten-year period, this investor would have missed-out on $8,000 - a significant chunk of change.
McDonald's usually maintains a fair valuation over the long term, as it performs relatively consistently. Currently, the stock has a trailing PE of 17.1, a forward PE of 15.27, and a PEG of 1.83.
The company has a wide profit margin of 20% and has $7.07 billion in operating cash flow for the past twelve months. McDonald's large economies of scale allow it to obtain food and supplies at low costs, keeping margins high.
McDonald's is able to achieve its consistency by serving approximately 69 million customers daily. The company has more than 33,500 locations in 119 countries. These customers are eating more than just burgers, fries, and shakes. There are some healthy choices on the menu as well. Some start their day with a cup of McDonald's Premium coffee from the McCafe. Some enjoy oatmeal, yogurt parfait, or real fruit smoothies as a healthy meal or snack. Salads are another healthy option currently on the menu. Of course, many customers also enjoy the less-nutritious options such as the Big Macs, Angus Burgers, Chocolate Shakes, and the McFlurry ice-cream deserts.
The company is focused on continuous improvement for sustained growth. One area of focus is nutrition and well-being. McDonald's now posts calorie counts right on the menu, so customers can make their picks accordingly. The addition of fruits and vegetables to the menu gives customers healthy choices so that they don't have to feel guilty about a daily trip to McDonald's. I would like to see a sequel to Morgan Spurlock's Super Size Me documentary showing someone eating at McDonald's three times per day for a month. For the sequel, I would like to see someone eat all of the healthy choices three times per day and be monitored by a doctor just like Spurlock did with the unhealthy choices. I would bet that the results of the healthy choices would have a positive effect on a person's vital statistics.
Through continuous improvement and further expansion into international emerging markets, McDonald's will continue to grow and raise its dividend annually. Those who choose to reinvest this reliable dividend will be rewarded over the long-term.
Disclosure: I am long MCD.