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yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

When I launched my Strategy Lab model dividend portfolio in September, 2012, I vowed to follow a buy-and-hold strategy.

"I don't intend to do much trading, apart from reinvesting my dividends every few months," I wrote. "That said, if a company's outlook takes a dramatic turn for the worse, I will consider giving it the boot and buying something more promising."

More than two years later, I'm announcing my first stock sale: McDonald's.

It brings me no joy to bid goodbye to the Golden Arches. I've "dined" on its double hamburgers countless times (and will continue to do so) and collected many juicy dividends from the company, both in my Strategy Lab portfolio and in my personal account.

But the burger giant's recent performance has been less than appetizing, and its results are getting worse, not better. More on that in a moment.

First, the good news: McDonald's was still a very profitable investment for my Strategy Lab portfolio – thanks largely to its growing dividend and a hefty drop in the Canadian dollar. My cost base on the 50 shares I owned was $4,465.87 (Canadian), and the proceeds of my Dec. 11 sale were $5,243.06, for a return 17.4 per cent.

Including the nine quarterly dividends I received totalling $378.10 – and ignoring any benefit from reinvesting that cash in my portfolio – the total return on my McDonald's investment was 25.9 per cent. Not bad, considering I sold the shares at $90.97 (U.S.), slightly below the purchase price of $91.57. (I also sold the stock personally, but at a larger profit since I bought it some years ago at a much lower price.)

So why did I sell? Simple: The business has taken a serious turn for the worse, and there are no guarantees that McDonald's can reverse the skid.

When I bought the shares for my Strategy Lab portfolio, McDonald's seemed to be doing fine. It had gone nine consecutive years without posting a drop in monthly same-store sales, a key measure of locations open for at least 13 months. I had every reason to expect the solid performance would continue.

But the next month – in October, 2012 – the fast-food giant's global same-store sales suddenly turned negative. I shrugged it off as an anomaly at first. But more negative months followed in 2013, and in 2014 the numbers became downright awful. For the third quarter ended Sept. 30, global same-store sales sank 3.3 per cent, and they fell again in the following two months. In a particularly worrisome sign, U.S. same-store sales fell 4.6 per cent in November.

To be sure, the chain's troubles in China – where a supplier was caught selling expired meat – and a sluggish European economy have hurt McDonald's. But Mickey D's problems go deeper. Intense competition, a reliance on cheap menu items to drive traffic and consumers' growing preference for foods perceived as healthier are all contributing to its lousy performance.

The growing "fast casual" segment, in particular, presents a huge challenge to McDonald's. Consider Chipotle Mexican Grill which, ironically, McDonald's spun off in 2006: In the third quarter, Chipotle's same-store sales soared 19.8 per cent, indicating that some consumers are trading Big Macs for burritos.

McDonald's has been down before and managed to bounce back by revamping its menu and marketing. It might succeed again this time, but I'd prefer to watch from the sidelines for a few reasons. For one thing, despite the huge challenges McDonald's faces, the stock still trades at a rich multiple of more than 16 times estimated 2015 earnings. That's no bargain.

For another, its annual dividend growth has slowed markedly, to about 5 per cent in the past two years from 10 per cent or more in the previous three. That's never a good sign.

Finally, I'm skeptical that McDonald's turnaround strategy will work. Starting next month, the chain plans to simplify its menu by eliminating certain slow-selling items and reducing the number of Extra Value Meals. That's supposed to speed up service and reduce costs, but it won't get any more customers through the door. It's also rolling out "Create Your Taste" touch-screen kiosks where patrons can order a customizable burger and get it delivered to their table. It's a fun, novel idea, but it's such a major departure from the way McDonald's has always done things that it might not click with customers.

Perhaps the best hope for the stock is that an activist investor steps in to shake up the company. On Tuesday, rumours to that effect sent the shares higher. I might become a McDonald's shareholder again, but I'd have to see the stock fall a lot further before I would be interested again.

In the meantime, there are better dividend growth opportunities out there. More on that in the New Year.