Confession: When I go out for lunch, it usually isn’t to a place with linen tablecloths and foie gras on the menu.
As a journalist, I like my food quick – and cheap.
Which makes me something of an authority on today’s subject: Restaurant stocks that pay rising dividends.
Each of the following “quick-service” chains – it sounds so much better than “fast food,” doesn’t it? – has a strong brand name, entrenched market position and a track record of boosting dividends.
For the record, I am not endorsing a diet that consists exclusively of burgers, doughnuts and pizza. It will be hard to enjoy your dividends if you die from heart disease, so be sure to eat a balanced diet and get plenty of exercise.
Similarly, you shouldn’t overindulge in restaurant stocks. Enjoy them in moderation, just as you would their high-sodium, high-fat menu items. Disclosure: I own all of these stocks personally, and also hold MCD in my Strategy Lab model dividend portfolio.
McDonald’s (MCD-NYSE) Yield: 3.2 per cent
McDonald’s Corp. has a track record of annual dividend growth that stretches all the way back to 1976, so you know it can perform in good times and bad.
Over the past five years, the dividend has grown at a sizzling annual pace of 12.8 per cent, and there’s every reason to believe it will hike its dividend again in September, when it typically announces increases.
To be sure, McDonald’s faces challenges. Same-store sales have been sluggish; they rose just 0.5 per cent globally in the first quarter amid intense price competition and weak economic growth. The company also regularly faces criticism over the nutritional quality of its menu items and the low wages it pays workers.
But for long-term income investors, McDonald’s is attractive for a few reasons. From 2014 through 2016, the company aims to return $18-billion to $20-billion to shareholders via dividends and share buybacks, representing an increase of up to 20 per cent from the previous three years. The money will come from debt refinancings, accelerated refranchising of about 1,500 corporate restaurants and free cash flow generated by the business.
Even as same-store sales are challenged, total revenue continues to grow through store openings. With 35,429 restaurants in 120 countries at the end of 2013, it plans to open 1,500 to 1,600 new locations this year and remodel another 1,000. Growth like that should keep those tasty dividend hikes coming.
Tim Hortons (THI-TSX) Yield: 2.2 per cent
Tim Hortons Inc.’s yield is modest, but the dividend has been growing at an impressive annualized rate of 25 per cent over the past five years. Unless Canadians suddenly stop pounding back double-doubles – not likely – there’s more where that came from.
The coffee chain’s same-store sales have increased in Canada for 22 consecutive years and, despite fears of saturation, it still sees plenty of growth in this country. With more than 3,600 Canadian restaurants currently, it’s aiming to open about 500 more by the end of 2018 and is keen to exploit “under-represented captive audience settings” such as office buildings, sports venues and health-care settings.
In the United States, where it has about 870 restaurants, it plans to add another 300 over the next four years. While questions remain about the long-term potential for Tims’ U.S. operations, the company is projecting overall growth in earnings per share of 11 per cent to 13 per cent from 2015 through 2018.
Investors have been richly rewarded: The total return – including dividends – over the past five years was 120 per cent, or about 17 per cent annually.
Pizza Pizza Royalty Corp. (PZA-TSX) Yield: 5.9 per cent
With Pizza Pizza Royalty Corp., you aren’t investing in the restaurant chain directly. Rather, you’re investing in the company that owns the trademarks and trade names, which it licenses to the chain in exchange for a royalty based on sales of stores included in the “royalty pool.” The details are a bit complex, but the key thing is that rising same-store sales are the main driver of dividend growth (new restaurants added to the royalty pool also help, but not to the same extent).
In January, Pizza Pizza Royalty raised its dividend for the fourth time in less than two years, and as long as Pizza Pizza (and its Pizza 73 chain in Western Canada) can keep same-store sales growing, there will be more hikes ahead.
Analyst Derek Lessard of TD Securities forecasts dividend growth of 5.6 per cent in 2014, 4.9 per cent in 2015 and 4.7 per cent in 2016.