McDonald’s is a perfect example of a company boosting its dividend in the face of economic weakness.
In 2007, it decided to boost its annual payment by a whopping 50%. Then, just last month, it decided to increase its dividend another 33%!
That means investors holding these shares keep getting higher and higher effective yields on their original purchase price.
Let’s go back a little further into McDonald’s history, before the latest two dividend hikes, to see what kind of results a long-time investor would have gotten:
Pretend it’s March 26, 1990. You just finished polishing off a Big Mac at the local McDonald’s. Across the restaurant’s floor, you see a long line of customers in front of the register, wallets and purses in hand.
You go home and call your broker. “Buy me 100 shares of McDonald’s,” you say. That day, the stock closes at about $29 a share. Its indicated dividend is $0.31, making the stock’s yield slightly more than 1%.
The move is certainly no great leap of faith. By 1990, McDonald’s restaurants are everywhere — it’s the fast food company by which all others are judged. Its stock is considered “boring.”
Now fast forward 16 years to March 27, 2006. McDonald’s stock closes at $34.55 a share. Its indicated dividend is $0.67 a share, giving the stock an annual yield of 1.9%. Hey, that’s twice as much as when you bought it, right?
Nope.
During your 16 years of ownership, McDonald’s stock split 2-for-1 on two occasions. Adjusting for these splits, your purchase price is equal to $6.20 a share.
Dividing the current indicated dividend of $0.67 a share by your $6.20 cost basis gives you a yield on cost of 10.8%. Plus, you’re also sitting on paper gains of 457%. That’s an average annual return of 28.6%. And, in addition, you got regular cash payments the whole time!
InvestingInDividends.com
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