Canada Markets closed

Which is the Better Dividend Aristocrat, McDonald’s or Coca-Cola?

Adam Brownlee, The Motley Fool

Dividend stocks give investors a cushion of cash flow when times get tough. Dividend Aristocrats,, the giants that have raised dividends for 25 years in a row, are among the most reliable dividend payers there are. McDonald's (NYSE: MCD) and Coca-Cola (NYSE: KO) are two such stalwarts. However, not all Dividend Aristocrats are created equal.

To decide which company is the better dividend payer, investors should analyze several factors: the company's dividend yield, its growth story, and the amount of earnings it pays out as dividends. Let's compare our Dividend Aristocrats on these measures to see which is the better investment today.

Image of people eating at McDonald's

Source: McDonald's

Dividend yield

In baseball, the supreme measure used to compare hitters is batting average. For dividend stocks, it is dividend yield. Dividend yield measures the size of a company's annual dividend payout relative to its share price. It is calculated by dividing the annual dividend per share by the current share price. Think of yield as a quick way to figure out how much cash flow an investment will send your way each year through dividends. For example, a stock with a yield of 4% will slide over $4,000 annually (before taxes) on a $100,000 investment.   

Coca-Cola has an advantage over McDonald's when it comes to dividend yield. Coke has a current yield of just over 3%, while McDonald's hovers around 2.25%. Looking back five years, McDonald's paid a yield closer to 3.5%, while Coke was still in the neighborhood of 3%. Why did the McDonald's yield drop while Coke's remained the same? 

   

The answer can be found in the share price changes for each of these companies.

KO Chart

Source: YCharts

Coke's share price has risen by 26% over the last five years, whereas McDonald's shares have skyrocketed by 105%. Even if a company's dividend per share increases, the business's yield will decline if share prices increase faster than dividends increase -- the denominator of the yield calculation is increasing faster than the numerator.  By digging a little deeper, we can uncover the stories behind these price fluctuations.

McDonald's sizzles, Coke sputters 

 Over time, every company will face its share of challenges. How management responds to these challenges will determine the fate of the business, and of shareholder returns.

Since 2015, McDonald's has been executing on a turnaround plan focused on slimming down its corporate management structure, serving up higher quality menu items, and delivering speedier customer service. These initiatives have shown up in stores in the form of Sirloin Third Pound burgers and sleek self-ordering kiosks that would not feel out of place on the bridge of the Starship Enterprise. 

Even better, McDonald's plan has worked.   Gross margins have increased by over one-thousand basis points and earnings have grown at a CAGR of 16.25%, since 2015.  Think of those gross margins in terms of selling a hamburger -- gross margin is the sales dollars left over from selling the hamburger after you pay for the patty and the bun. For investors, McDonald's turnaround led to an outstanding run-up in its share price, which, in turn, knocked down its yield. This was great news for the guy holding shares back in 2015. For the investor seeking yield today, however, it could leave us hungry for more.  

Turning to the world of Coke, the purveyor of pop has been slogging through a nightmare of consumers heading for the exits. Over the last 20 years, consumption of full-calorie soda has dropped by 25%, while bottled water sales have shot to the rafters. This exodus has fizzed up through Coke in the form of flat revenues and a tepid 1.88% earnings  CAGR over the last 10 years. Management rallied in 2014 with a plan to bust the slump by using, among other tools, bottler refranchising and investments in healthier beverages such as organic, cold-pressed juices and plant-based protein drinks. However, unlike McDonald's blueprint, this line-up has produced limited results.

Over the last couple of years, revenues at Coke have dropped by double digits and over the last five years earnings growth has bounced from extreme lows of -81% to highs of 417%.  Pings of salvation, however, have surfaced in the form of higher gross margins in recent years and comparable earnings growth of 9% in 2018. This last bit of news is refreshing for Coke shareholders, as it indicates the plan may be taking root. However, the previous onslaught led to stagnant share prices and left the yield hovering around 3%. For the investor holding shares in 2015, this turned out poorly, but for the investor looking for income today, this yield is more attractive than McDonald's. 

When it comes to dividend yield, on first glance it appears that Coca-Cola is the Mickey Mantle of income investing while McDonald's is a minor league hitter. However, a closer look at the stories behind these yields reveals that McDonald's has been slugging away successfully while Coca-Cola has come up dry. A high yield alone does not prove that a company is a good investment.  

Payout Ratios

Companies have a bevy of options for how to use their earnings. Management can use earnings to pay down debt, buy new brands, repurchase shares, or, in our case, pay out dividends. The amount of earnings paid out as dividends is called the payout ratio, which is calculated by simply dividing the company's per share dividend payments by its earnings per share. Think of the payout ratio as the amount of wiggle room a company has to continue paying out dividends. If the ratio is 100%, then the company has run out of room and is using all of its earnings to pay its dividends. Wise investors will check for a wide berth in the payout ratio.

For our Dividend Aristocrats, the expectations are that management will continue to raise dividends regardless of what earnings do. After-all, company leaders don't want to break investors' hearts by snapping a 25-year streak of dividend raises. These raises are not a problem for companies that are growing earnings. For those that have struggled, however, this is bad news.

McDonald's management has raised the quarterly dividend by a compounded rate of 7.4% over the last five years while earnings have grown at a CAGR of 6.32%. This has led to a payout ratio of around 60% which gives the company a healthy forty cents of wiggle room out of every dollar it earns to cover the dividend payment. 

For Coke, though, things are becoming claustrophobic. Over the last five years, management has raised the quarterly dividend by a compounded rate of 5%  while earnings have shrunk by a CAGR of nearly 5%. This disastrous pinch has led to a payout ratio of nearly 96%.   This four cents of wiggle room should raise alarm bells for dividend investors, as unsustainable payouts lead to dividend cuts regardless of whether a company has a long history of dividend increases.  

Final analysis

Dividend Aristocrats give investors a level of comfort that dividends will be paid and raised long into the future. However, a closer look at yields, growth stories, and payout ratios shows that not all Dividend Aristocrats are alike. In the face-off between McDonald's and Coke, we find that Coke's recent story is rife with slowing growth and a squeezed payout that threatens the cash flow to investors. McDonald's, on the other hand, has hit a solid line-drive with a turnaround plan that has grown earnings and created enough space to reliably cover continued dividend increases. Wise dividend investors hungry for yield will add McDonald's to their starting line-up. 

More From The Motley Fool

Adam Brownlee owns shares of Coca-Cola and McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

  • Finance
    Bloomberg

    Can Boris Johnson Pull Off the Impossible? We’re Counting the Votes

    (Bloomberg) -- Boris Johnson has managed to strike a new Brexit deal with the European Union. But does he have the numbers to get it past Parliament?Well short of a majority, he needs to persuade 61 Members of Parliament to back his deal. He looks more than half-way there, based on public comments made

  • Which Is Scarier, Climate Change or CLOs?
    Finance
    Bloomberg

    Which Is Scarier, Climate Change or CLOs?

    (Bloomberg Opinion) -- Call it the Greta effect. Global finance titans gathered at the annual International Monetary Fund meetings in Washington this week identified climate change as a key risk to the long-term health of the world economy. It was one of the hot topics discussed, perhaps partly inspired

  • Global finance leaders hopeful for modest rebound in 2020
    Finance
    The Canadian Press

    Global finance leaders hopeful for modest rebound in 2020

    WASHINGTON — Global finance leaders agree that growth has slowed but they remain hopeful for a modest rebound next year as long as trade and geopolitical tensions do not worsen.That was the assessment Friday from finance ministers and central bank governors of the Group of 20 major industrial countries.Those

  • Opioid negotiations fail to produce deal just before trial
    Finance
    The Canadian Press

    Opioid negotiations fail to produce deal just before trial

    Negotiations aimed at reaching a major settlement in the nation's opioid litigation reached an impasse Friday.Key differences were between state attorneys general and lawyers representing local governments, rather than with the drugmakers and distributors they are suing.One of the negotiators, North

  • Parliament Votes on Boris Johnson’s Brexit Deal: Your Guide
    Finance
    Bloomberg

    Parliament Votes on Boris Johnson’s Brexit Deal: Your Guide

    (Bloomberg) -- Britain’s Parliament meets Saturday to pass judgment on Boris Johnson’s Brexit deal. How will the day play out?0830 European Research Group of pro-Brexit Conservatives meets, to try to agree a position. The premier needs almost all of them to support him if his deal is to pass.0930 Parliament

  • Brexit Decision Day Arrives as U.K. Parliament Votes on Deal
    Finance
    Bloomberg

    Brexit Decision Day Arrives as U.K. Parliament Votes on Deal

    (Bloomberg) -- Boris Johnson will put his Brexit deal to Parliament to accept or reject Saturday, knowing that his political future and that of the country he leads are on the line in the knife-edge vote.The U.K.’s 650 members of Parliament will convene in Westminster for only the fourth Saturday sitting

  • Finance
    Bloomberg

    China’s Liu Confirms Phase One of U.S. Trade Deal is in Progress

    (Bloomberg) -- China’s top trade negotiator offered positive signals that talks with the U.S. are making progress and both sides are working toward a partial trade deal.“China and the U.S. have made substantial progress in many aspects, and laid an important foundation for a phase one agreement,” Vice

  • Finance
    Bloomberg

    U.S. Mulls Extending Chevron’s Venezuela Waiver With More Limits

    (Bloomberg) -- The Trump administration is considering an extension of Chevron Corp.’s waiver to operate in Venezuela, albeit with even greater limitations, according to people familiar with the matter.The 90-day sanctions reprieve would allow Chevron to continue its role as the last major U.S. oil producer

  • Finance
    Bloomberg

    PG&E Has No Intention of Paying People for Blackout Right Now

    (Bloomberg) -- The millions of Californians who were plunged into darkness during an unprecedented blackout last week shouldn’t expect a check in the mail from bankrupt utility giant PG&E Corp. anytime soon. When asked by a state regulator on Friday whether the utility plans to pay back customers for

  • Open Text Weighs Takeover Offer for Rival Sofware Firm Micro Focus
    Finance
    Bloomberg

    Open Text Weighs Takeover Offer for Rival Sofware Firm Micro Focus

    (Bloomberg) -- Canada’s Open Text Corp. is weighing a takeover bid for rival software firm Micro Focus International Plc, according to people familiar with the matter.Open Text is speaking spoke to potential advisers about whether to make an offer, said the people, who asked not to be identified because

  • Finance
    Bloomberg

    PG&E to California: How About You Try Calling the Next Blackout?

    (Bloomberg) -- The chief of California utility giant PG&E Corp. has a suggestion for those state officials attacking the company over an unprecedented blackout it orchestrated last week to prevent wildfires: Why don’t you try making the call next time?Bill Johnson, chief executive officer of the embattled

  • California regulator slams PG&E over electricity shut-off
    Finance
    The Canadian Press

    California regulator slams PG&E over electricity shut-off

    SAN FRANCISCO — California's top regulator excoriated top executives of the state's largest utility even as Pacific Gas & Electric repeatedly said they know they failed to meet public expectations when it cut the power to more than 2 million people last week.Marybel Batjer, president of the California

  • World’s Longest Flights Aren’t Meant for Cattle Class
    Finance
    Bloomberg

    World’s Longest Flights Aren’t Meant for Cattle Class

    (Bloomberg Opinion) -- The question about Qantas Airways Ltd.’s plans to start 20-hour direct flights from Sydney to London and New York isn’t why any passenger would want to take the route — it’s why any carrier would want to offer them.For all the hardship of spending a day cooped up with the body

  • The Latest: California names director for wildfire safety
    Finance
    The Canadian Press

    The Latest: California names director for wildfire safety

    SAN FRANCISCO — The Latest on a massive power shut-off last week in Northern California (all times local):4:45 p.m.California Gov. Gavin Newsom has named the first director of a new Wildfire Safety Division.Newsom said Friday that Caroline Thomas Jacobs will head the new division under the state'

  • California unemployment rate falls to record low of 4%
    Finance
    The Canadian Press

    California unemployment rate falls to record low of 4%

    SAN FRANCISCO — California's economy kept humming in September, dropping the unemployment rate to a record low 4% statewide and under 2% in San Francisco and some of its neighbouring counties, a level that economists once thought impossible."That is almost unthinkable," said Sung Won Sohn

  • US officials propose less paperwork for mineral royalty cuts
    Finance
    The Canadian Press

    US officials propose less paperwork for mineral royalty cuts

    CHEYENNE, Wyo. — A U.S. Bureau of Land Management proposal published Friday would make it easier for mining companies to request lower government royalty rates for certain minerals, an idea backed by supporters of an industry that supplies much of the world's baking soda.The proposal would reduce

  • Deep-sea explorers find Japanese ship that sank during WWII
    Finance
    The Canadian Press

    Deep-sea explorers find Japanese ship that sank during WWII

    Deep-sea explorers scouring the world's oceans for sunken World War II ships are focusing in on debris fields deep in the Pacific, in an area where one of the most decisive battles of the time took place.Hundreds of miles off Midway Atoll, nearly halfway between the United States and Japan, a research

  • Ex-salon chief alleges Wynn Resorts spied at his new job
    Finance
    The Canadian Press

    Ex-salon chief alleges Wynn Resorts spied at his new job

    LAS VEGAS — A former beauty salon director who went public about sexual misconduct allegations against casino mogul Steve Wynn nearly two years ago is suing Wynn Resorts and company executives, alleging they invaded his privacy and spied on him at his next job in a bid to undercut his accounts.Jorgen

  • Casper Is Said to Work With Morgan Stanley, Goldman on IPO
    Finance
    Bloomberg

    Casper Is Said to Work With Morgan Stanley, Goldman on IPO

    (Bloomberg) -- Online mattress retailer Casper Sleep Inc. is working with Morgan Stanley and Goldman Sachs Group Inc. on a U.S. initial public offering, according to people with knowledge of the matter.The New York-based company could go public as soon as this year or the first half of 2020, said the

  • Against the Tide, Cocoa Growers Plan to Suspend Ethical Programs
    Finance
    Bloomberg

    Against the Tide, Cocoa Growers Plan to Suspend Ethical Programs

    (Bloomberg) -- In a world that’s growing increasingly concerned about corporate commitments to environmental and social responsibility, top cocoa producers Ivory Coast and Ghana are planning to make a move that goes against the tide.The West African nations, which produce more than 60% of the world’s

  • Messages from former Boeing test pilot reveal Max concerns
    Finance
    The Canadian Press

    Messages from former Boeing test pilot reveal Max concerns

    DALLAS — A former senior Boeing test pilot told a co-worker that he unknowingly misled safety regulators about problems with a flight-control system that would later be implicated in two deadly crashes of the company's 737 Max.The pilot, Mark Forkner, told another Boeing employee in 2016 that the

  • News Corp to supply headlines for Facebook's upcoming news tab
    News
    Reuters

    News Corp to supply headlines for Facebook's upcoming news tab

    The WSJ, which first reported about the deal, said news publications Washington Post, BuzzFeed News, and Business Insider have also reached a similar deal with Facebook. The news organizations will be paid a licensing fee to supply headlines, the WSJ reported.

  • Finance
    The Canadian Press

    Google affiliate begins drone deliveries in Virginia town

    A Google affiliate started using drones Friday to deliver customers' Walgreens and FedEx purchases in a test being run in a Virginia town.Wing, which is owned by Google parent Alphabet, received federal approval earlier this year to make commercial deliveries by drone. It was the first drone company

  • Oil Short-Sellers’ Gloom Deepens With Price Stuck Below $55
    Finance
    Bloomberg

    Oil Short-Sellers’ Gloom Deepens With Price Stuck Below $55

    (Bloomberg) -- Hedge funds are increasingly pessimistic on oil as U.S. stockpiles surge and crude refining plunges.Bets on a West Texas Intermediate crude rout rose 7.6% in the week ended Oct. 15 and have almost tripled since mid-September, data released Friday show. A report showing American crude storage

  • Google affiliate begins drone deliveries in Virginia town
    Finance
    The Canadian Press

    Google affiliate begins drone deliveries in Virginia town

    A Google affiliate started using drones Friday to deliver customers' Walgreens and FedEx purchases in a test being run in a Virginia town.Wing, which is owned by Google parent Alphabet, received federal approval earlier this year to make commercial deliveries by drone. It was the first drone company