Are you currently in need of more dividend income rather than growth in your portfolio? Or, perhaps, is it more about having consistent dividend growth instead of a high initial yield?
If you find yourself saying yes to both, consider this option: McDonald’s (MCD 0.24%).
McDonald’s is more than it seems
With over 45,000 locations globally, McDonald’s is indeed the largest fast-food chain in the world. That’s a given.
But, when you dig deeper, McDonald’s represents something entirely different. It’s also the biggest franchisor in terms of revenue.
Yet, what makes this company particularly interesting for income-focused investors is its core as a large real estate entity. Approximately 80% of its outlets are leased to franchisees, who are responsible for running about 95% of its restaurants.
That’s, um, a bit of a simplification. It sort of overlooks the nuance in the relationship between McDonald’s and its franchise operators. They don’t just follow a standard model—McDonald’s benefits by taking a share of the revenue generated by each region. Additionally, franchisees buy supplies from McDonald’s at favorable rates. There’s also collaboration on renovation and, sometimes, marketing costs.
However, the biggest ongoing expense for franchisees remains their rent obligation to McDonald’s for using real estate owned by the company.
Things can get a bit complicated here. Rent is based on the market, meaning it tends to rise over time and must be paid regardless of how well a specific location is doing.
Is that fair? Well, that’s subjective. Still, the point about McDonald’s being a top-tier brand in the fast-food sector stands. While this arrangement isn’t typical in the franchise world—where many operators own their buildings—being permitted to operate under the iconic Golden Arches has undeniable benefits.
What’s in it for you?
For those keen on income, this focus on rental properties is indeed key to enjoying reliable dividend growth. In fact, McDonald’s has raised its dividend every quarter for an impressive 49 years, nearing the milestone of Dividend King status.
And it’s noteworthy. The recent 5% increase last quarter reflects nearly a 100% rise over the past decade, translating into an annualized growth rate of just above 7%, which has easily outstripped inflation during that time.
Now, don’t expect to see rapid growth or capital appreciation from holding shares in McDonald’s. That’s just not the nature of this well-established, crowded market.
That said, engaging with this fast-food giant could lead to above-average dividend growth, especially with a solid forward yield of around 2.3%. It’s a decent entry point for anyone looking at a quality long-term investment.
