Wendy's(NASDAQ: WEN) and Burger King are fierce competitors, and Wendy's overtook Burger King as the No. 2 QSR (quick service restaurant) burger chain in the United States by sales last year. But is Wendy's -- or Burger King's parent company Restaurant Brands International -- (NYSE: QSR) the better dividend stock going forward?
Happy hunting for dividend investors
The fast food restaurant industry is a good place for dividend investors to look for additions to their portfolios. These are typically mature, stable businesses with resilient revenue and earnings. Restaurants like Wendy's and Burger King are relatively inexpensive options, so they are fairly defensive plays when it comes to a recessionary environment.
Furthermore, most of their restaurants are franchised, which means that they have recurring revenue in the form of royalty payments from franchisees. These royalties also help to provide them with some insulation from inflation, as they are based on revenue.
I'll have a large order of dividends, please
Wendy's is the No. 2 QSR burger chain in the United States and has about 7,000 locations. Meanwhile, Restaurant Brands is much larger with about 29,000 locations in 100 countries. Restaurant Brands differs from Wendy's in that instead of just one concept, it has Burger King, Tim Hortons, Popeyes Louisiana Kitchen, and Firehouse Subs.
Both Wendy's and Restaurant Brands feature a market-beating dividend, with Wendy's currently yielding about 2.3% and Restaurant Brands yielding 3.2%. This doesn't sound like a huge difference, but over a long time frame, an investor buying Restaurant Brands today and reinvesting the dividends could expect to see much more in payments than an investor buying Wendy's.
For example, assuming the share price remains constant and the companies keep their payments flat for the next 10 years (this will not be the case, so returns should likely be much greater than in this exercise), an investor putting $10,000 into Wendy's today and reinvesting the dividends could expect to receive $2,552 total in annual dividend payments over the course of the next decade, which isn't too shabby.
However, an investor putting the same amount into Restaurant Brands would receive a far superior $3,795 total in annual dividend payments over the same time frame. As you can see, this 1% difference in yield makes a big difference over time.
More than yield
When evaluating dividend stocks, there's also a lot more to consider than just yield.
While Restaurant Brands has grown its dividend for eight years in a row, Wendy's currently has just a two-year streak of dividend increases after reducing its dividend payout in 2020.
Restaurant Brands has grown its dividend 20% over the past five years, versus 47% for Wendy's, although the cut in 2020 takes some of the gloss off of this number. From a dividend safety perspective, both stocks look fine right now, with Wendy's featuring a dividend payout ratio of 61% versus a 68% payout ratio for Restaurant Brands.
From a qualitative perspective, I also like the fact that Restaurant Brands has a wide variety of concepts contributing to its income, ranging from Burger King to Popeyes. This gives it a bit of diversification and mitigates the risk of a single concept falling out of favor with consumers, which could hurt a stock's ability to pay a dividend.
Wendy's trades at a slight premium to Restaurant Brands, but overall the stocks are comparable in terms of valuation.
Both Wendy's and Restaurant Brands look like solid dividend stocks going forward, but Restaurant Brands looks like the superior choice for dividend investors based on its higher yield and longer track record of increasing its dividend payout. While Wendy's has grown its dividend at a faster rate over the past five years from 2018 to 2022, Restaurant Brands has grown its dividend more consistently.
The diverse group of companies in Restaurant Brands' portfolio and its slightly cheaper valuation also add to its appeal in this comparison. Overall, based on these factors, Restaurant Brands looks like the better stock for dividend investors.
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