McDonald's Corporation (MCD) Dividend Analysis

McDonald's Corporation, together with its subsidiaries, franchises and operates McDonald's restaurants worldwide. Its restaurants offer various food items, and soft drinks and other beverages.
MCD is a dividend aristocrat as well as a component of the S&P 500 and Dow Jones Industrials indexes. The company has been increasing its dividends for the past 31 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 11.00 % to its shareholders. During the first five years, the stock price was in a decline. Ever since MCD hit a bottom in early 2003, the stock has been outperforming the market.

At the same time company has managed to deliver a 6.70% average annual increase in its EPS since 1998.

The ROE fluctuated between 9% and 23%, rising and falling with the fluctuations of EPS over the past decade.

Annual dividend payments have increased over the past 10 years by an average of 25% annually, which is much higher than the growth in EPS. A 25% growth in dividends translates into the dividend payment doubling almost every three years. If we look at historical data, going as far back as 1979, MCD has actually managed to double its dividend payment every four years on average. The company recently switched from paying annual dividends to paying dividend payments quarterly.

If we invested $100,000 in MCD on December 31, 1997 we would have bought 4188 shares (Adjusted for A 2:1 stock split in March 1999). In 1998 your annual dividend income would have amounted to $739. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $7044 by December 2007. For a period of 10 years, your annual dividend income has increased by 853 %. If you reinvested it though, your annual dividend income would have increased by 752%.

The dividend payout has remained at or below 40% over our study period. In 2007 however, the payout has risen above 70%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that MCD is currently overvalued at a P/E of 27 and a payout ratio of over 75%. The only positive is the solid dividend yield and above average dividend growth. I would consider initiating a long position in MCD on dips below $40.

Disclosure: I do not own shares of MCD

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The Dividend Investing and Value Network (DIV-Net).

It is with great pleasure that I announce the debut of The Dividend Investing and Value Network (DIV-Net).

Dividend Growth Investor is proud to be a founding member of this new investing network. DIV-Net is a network of investors focused on dividend investing, value investing and a long-term buy and hold philosophy.We want The DIV-Net site to be a destination. Unlike most networks, The DIV-Net site will provide original unpublished content daily from a growing network that contains the best authors in the field. Seven Core Members are responsible for maintaining and administering The DIV-Net site and the DIV-Net network.This is where some networks stop. However, we so strongly believe in the virtues of dividend investing, value investing and a long-term buy and hold philosophy and did not want to limit DIV-Net to just seven members. In our desire to include as many bloggers that are interested in dividend investing, value investing and a long-term buy and hold philosophy, we created an Associate Membership.

Our Core Members include:

Dividends4Life
The Dividend Guy
Dividend Growth Investor
the moneygardener
Stock Market Prognosticator
The Div Guy
Disciplined Approach to Investing

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Living Off Dividends and Passive Income
Old School Value
The Dividend Investing Blog
Triaging My Way To Financial Success
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The price of higher current yield -Canadian Royalty Trusts

There are several Canadian royalty trusts which trade on the NYSE.

Advantage Energy Income Fund (AAV), based in Calgary, currently yields 11%. Its monthly dividend payments have declined from $0.23/unit in 2004 to $0.12/unit in 2008.

Baytex Energy Trust (BTE), also based in Calgary, currently yields 7.50%. Its monthly dividend payments have increased from $0.16/unit in 2006 to $0.20/unit in 2008.

Enerplus Resources fund (ERF) currently yields 10.70%. Its monthly dividend payments have greatly fluctuated between $0.20/unit and $0.52/unit since 2000.

Harvest Energy Trust (HTE) currently yields 14.40%. Its monthly dividend payments have fluctuated significantly less than other trusts – between $0.29/unit and $0.36/unit since 2005.

Pengrowth Energy Trust (PGH) currently yields 13.50%. Its monthly dividend payments have also fluctuated significantly less than other trusts – between $0.19/unit and $0.23/unit since 2004.

Penn West Energy Trust (PWE) currently yields 12.20%. Its monthly trust distributions have fluctuated between $0.29/unit and $0.35/unit since 2006.

They do look appealing to investors because of their high dividend yields of 10%-15% annually. Not only are the dividends paid monthly, which allows for a better dividend income compounding, but some of them also allow investors to purchase shares through DRIPs at discounted prices. Unlike most other “normal” stocks, dividend payments from the Canadian income trusts tend to fluctuate a lot.

Most trusts are engaged in oil and gas production and have average reserve lives of about 10 years. Unlike similar US trusts however, Canadian Royalty trusts can purchase new assets and make acquisitions, which could extend their lives forever.

The Canadian government applies a 15% non-resident withholding tax on distributions to U.S. investors. U.S. investors can apply for a refund for at least a portion of the amount withheld. Many Canadian trusts provide information for income tax filing instructions for U.S. unitholders on their Websites. Nevertheless, it can be a complicated process at tax time, thus U.S. investors should consult with a qualified tax advisor before investing.

Like any other investment that offers above-average dividend yields however there’s a catch: the reason why CanRoy’s are able to pay huge dividends is because they are not taxed at the corporate level and pass all of their income to shareholders. This is going to change in January 2011. Since many trusts pay all of their income in distributions to unit holders, they expand their operations through sales of additional units. The uncertainty related to the 2011 tax law changes make it difficult for trusts to expand. For example trusts that were formed before October 31 2006 cannot sell more than a certain amount of new units (stock), otherwise they will lose their preferential tax status even earlier than 2011.

Under the existing provisions of the Tax Act, income trusts can generally deduct in computing their income for a taxation year any amount of income that they distribute to unitholders for the year. According to the new bill, introduced in 2006, Income trusts will not be able to deduct certain portions of their distributed income (referred to as specified income).
Pursuant to the draft legislation, the distribution tax will only apply in respect of distributions of income and will not apply to returns of capital. Some trusts have substantial tax pools that could be applied to reduce the impact of the new tax for several years post-2011.

Under the new legislation the proposed tax will be 29.5 percent in 2011 and 28.0 percent in 2012 based upon a 13 percent provincial tax rate and a federal tax of 16.5 percent reducing to 15 percent in 2012. Add this to the 15% tax that US investors already pay on income trust distributions, and the higher yields might not look so good. Under the budget released by the Minister of Finance on February 26, 2008, the 13 percent provincial tax will be replaced under an allocation formula with the applicable provincial income tax rates for each province in which the income trust has a permanent establishment. Trust are likely to continue to take advantage of growth opportunities with an increased focus on assessing international acquisition opportunities given that revenue from outside Canada will likely not be subject to the new tax. In addition, trusts will likely continue to carefully manage their substantial tax pools to mitigate the impact of the new tax on our unitholders.

When to sell your dividend stocks? Part 2

Last week I laid out some of my reasons why I am hesitant about selling stocks which have cut their dividends.















This chart really sums it all up – dividend cutters as well as non-dividend payers underperformed dividend growers by about 5% on average per annum from 1972- 2005.
At the end of the day I am in this game not only for the increasing dividend income but also for the capital gains that stock ownership might lead to.

Additional research from Prof Siegel about the performance from 1957 to 2007 of the original 500 stocks of the S&P 500 index suggests that there is a high chance that a well diversified portfolio ,which is representative of the major market sectors of its days, will perform close to what the overall market returns.

Due to the different information and research out there I will choose to sell or hold a stock that cuts its dividend on a case by case basis. Additional capital, however will not be allocated to dividend cutters, although dividends will be automatically reinvested.

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- When to sell your dividend stocks?
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Illinois Tool Works (ITW) Dividend Analysis

Illinois Tool Works, Inc. manufactures a range of industrial products and equipment
ITW is a dividend champion as well as a component of the S&P 500 index. The company has been increasing its dividends for the past 44 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 8.00 % to its shareholders.

At the same time company has managed to deliver a 10.80% average annual increase in its EPS since 1998.

The ROE fell from its 1998 highs of over 20% to its 2001 lows at 10%, before recovering all the was back to 20% by late 2000’s.

Annual dividend payments have increased over the past 10 years by an average of 15.70% annually, which is much higher than the growth in EPS. A 16% growth in dividends translates into the dividend payment doubling almost every four and a half years. If we look at historical data, going as far back as 1987, ITW has actually managed to double its dividend payment every five years on average.

If we invested $100,000 in ITW on December 31, 1997 we would have bought 3389 shares (Adjusted for A 2:1 stock split in May 2006). In March 1998 your quarterly dividend income would have been $203. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1078 by December 2007. For a period of 10 years, your quarterly dividend income has increased by 367 %. If you reinvested it though, your quarterly dividend income would have increased by 430%.

The dividend payout has remained at or below 38% over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that ITW is attractively valued with its low price/earnings multiple of 15 low DPR and competitive yield at 2.20%.

Disclosure: I own shares of ITW

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