Dividends that Grow

It’s ridiculous what passes as investment advice on dividend stocks these days.

For instance, every time I see a “Top 5 Dividend Stocks” article, the author invariably recommends McDonald’s (NYSE: MCD).

Yeah, the same McDonald’s that has seen U.S. sales declines for the last nine months in a row and missed quarterly earnings estimates for the last four quarters…

There’s no doubt that McDonald’s was one of the great dividend stories of the last 20 years. But that doesn’t mean that trend will continue.

In my opinion, the recent revenue and earnings declines are the trends you should be watching. And there is no reason to think these trends will magically reverse.

If you buy the stock now, you are just guessing that this is the end of the negative earnings trend. You probably know guesswork is not a very good investment plan.

Right now, McDonald’s is trading around $97. The 52-week high is $103.78, and the 52-week low is $87.62. That $103.78 is also the stock’s all-time high. Is it really a good idea to buy a company with declining revenues and earnings that are just 5% below its all-time high?

Um, no.

McDonald’s stock is not cheap. The price-to-earnings (P/E) ratio is 20, higher than the S&P 500 average. But what will earnings be a year from now? They could very well be lower that what analysts are expecting. In fact, the trend says they will be…

And the payout ratio for the dividend is 68% (the payout ratio is the amount of earnings that go to the dividend). Without a nice jump in earnings, McDonald’s dividend is not going higher.

Right now, analysts are looking for ~10% earnings growth over the next year. Why? Is there any evidence that things are getting better for McDonald’s?

You may have noticed that I’ve asked a lot of questions about McDonald’s earnings, revenue, and valuation. When selecting a dividend investment, you shouldn’t have to ask a lot of questions. There should be clear growth trends from which you can form reasonable conclusions.

The McDonald’s Problem

We could point to execution as a problem for McDonald’s. After all, the company had a problem with one of its chicken suppliers selling it expired meat in China. It had to stop using so-called “pink slime” in 2012. And a 2014 consumer poll found it had the worst-tasting burgers.

We could also point to changing demographics. Visits by the 19- to 21-year-old demographic are down 13%. Visits by the 22- to 37-year-old crowd are not growing. As Americans become more aware of the obesity problem, they are seeking healthier alternatives.

We could also point to competition. If you want healthy, you can hit Chipotle (NYSE: CMG) for about the same price as a McDonald’s meal. And if you want a better burger, you can hit Five Guys, Shake Shack (NYSE: SHAK), or Habit Burger (NASDAQ: HABT). Chick-Fil-A is an increasingly viable option for decent fast food, as is Subway.

Basically, McDonald’s is under siege from all sides. And yet investors do not seem concerned that these problems will persist. How else can we interpret that fact that the stock is just 5% below all-time highs?

I think the risks are high for McDonald’s. And any so-called “analyst” that recommends the stock without addressing these issues in detail is simply irresponsible.

Of course, there is always risk when you put your money on the line. It comes with the territory. But there’s just no reason to take on the risks that exist with McDonald’s. There are plenty of dividend stocks out there that are growing revenue, that are not suffering from competition, and that have upside for their dividends.

Dividend Upside

Wealth Daily readers know how I feel about Bank of America (NYSE: BAC). It trades below book value, it has great earnings growth this year now that mortgage problems are behind it, and it has more than 100% upside to its dividend. Higher interest rates will be good for earnings.

It’s just under $16 now and can easily trade to $20 or higher in the next 12 months.

Ford (NYSE: F) is another one. It’s got 37% earnings growth this year. It’s selling a record amount of cars. Sales in Europe are turning around after that region has been a major drag over the last few years. And it’s likely to announce a dividend hike toward the end of the year, just like it did in 2014.

Starbucks (NASDAQ: SBUX) looks a lot like McDonald’s did 20 years ago, when it really started ramping up its dividend payments. It’s a very well run company, it has a strong brand, it’s got a growing international presence, and it only recently started paying a dividend.

Starbucks is starting to get better with food because it wants to boost its ticket averages. The customers are there — they just need to spend more.

It’ll happen, and when it does, revenues can grow sharply, and the dividend will get bigger.

My point is this: Be careful when you read financial media coverage. The media is usually more interested in using the right Google search terms than in providing truly helpful information.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.