Is McDonald’s a dividend stock to buy in February?

Consumers know McDonald’s (NYSE:MCD) good for its burgers, but investors may know it best for its dividends. The popular fast food chain has a long history of regular payouts, calling it a dividend aristocrat, meaning it has paid and increased its dividend for at least 25 years. In fact, McDonald’s has paid a growing dividend for 45 years, putting it well on its way to becoming a dividend king.

Of course, many investors use dividend-paying stocks to supplement their retirement income. So a stock with a long history of paying dividends offers an extra degree of reliability. After all, if it has maintained its dividend for more than 45 years, it has likely weathered at least a few economic downturns.

Let’s take a closer look at McDonald’s and its ability to pay a dividend to determine if it’s a stock income investors should buy in February.

McDonald’s stock has a dividend yield of 2%. Image source: Getty Images.

All signs point to continued dividend growth

On January 27, McDonald’s announced its operating results for its fourth quarter and fiscal year ended December 31. Among the many impressive numbers found in the report is its earnings per share (EPS) of $10.04 for 2021. This was 59% higher than in 2020 and by far the highest the company has earned during of the last decade.

Over the long term, dividends are supported by earnings. If a company pays more dividends than it generates profits, it is as if a household was spending more than it earned. Eventually, savings will run out or credit cards will run out, and expenses will forcefully adjust to income. Since dividends are paid out of earnings, EPS growth is a great sign for income investors.

As of this writing, McDonald’s stock has a dividend yield of 2.03%. That said, the company’s solid earnings growth allows it to continue to increase its dividend – and the company has a long history in this area. McDonald’s stock investors saw their annual dividends per share rise from $2.87 in 2012 to $5.25 in 2021.

Indeed, its distribution rate, which corresponds to the part of the profits that it chooses to pay out in dividends, is 51.9%. This rate is close to its lowest level in the last five years. Note that the rate went down not because McDonald’s cut its dividends, but because profits increased dramatically.

Additionally, since McDonald’s operates on a franchise business model, where franchisees contribute the capital needed to open new restaurants, this allows it to pay a higher dividend without restricting growth.

Is McDonald’s a dividend stock to buy?

McDonald’s is arguably in a great position to continue paying and increasing its dividend. Stock isn’t expensive either. Based on its price-to-earnings ratio of 25.8 and price-to-free cash flow ratio of 27.4, McDonald’s is trading at roughly its average valuation over the past five years.

Considering McDonald’s is emerging from the reopening of the economy stronger than ever, as evidenced by its strong earnings, the stock is a relative bargain. Income-seeking investors may feel good about adding McDonald’s stock to their portfolios in February.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

About Robert Moody

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