Dividends for You and Your Grandkids
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In 1932, Herman Franke of Muskegan, Michigan set in motion a financial train of events that impacts my life today. He bought five shares of AT&T (NYSE: T) for $517. Mr. Franke, a wholesale confectioner and my great-great uncle likely had no clue what impact he would have on his descendants. In the 1950's, my grandmother was so confident in AT&T she took a deep breath and plunked down $50,000 for more AT&T stock. This investment was on top of holdings already held and passed down from from previous generations. My grandmother told her children, emphatically, "Never sell this stock!" It was good advice. Unlike so many other companies of that day, AT&T has stayed in business, grown and rewarded its shareholders. Yes, it's had its ups and downs. However, it remained in business and, perhaps most importantly for my benefit, always paid a dividend (once it started paying one). The dividend generally went up every year although for a couple years it spiked and then went down. Never the less, it's been a steady performer.
Today, as an heir to this AT&T investment, I am reaping the benefits of my family's foresight and generosity. No "I'm spending my kids' inheritance" bumper stickers ever graced their cars. They knew the future would be tough at times and did what they could to help their children and grandchildren through. As an investment, AT&T is still not a bad deal. The stock price has fluctuated quite a bit, especially over the past 15 years. The dividend, spike and drop mentioned earlier not withstanding, has continually been paid and has usually gone up annually. It currently pays about 4.7%, not bad all things considered. I have no intention of ever selling but instead I'm using dividend reinvestment to grow my position. The beauty is, in some respects, the stock price performance doesn't matter. This is a dividend cash cow and as long as earnings hold up, the dividends will be paid and I don't have to fret about the value of my holding. My hope is this stock will provide my two daughters with a financial cushion to help them navigate the difficult financial times I see coming.
Looking ahead to my retirement, I've decided to copy my family's past strategy: buy a solid dividend paying company and hold. My investment choice for the future is McDonald's (NYSE: MCD). According to the good folks at 1stock1.com, MCD has been paying dividends for the past 35 years, has raised dividends for every one of them and has increased dividend payout by an average of 25% since 1977. Right now, the yield is around 3%, not too bad, not too great. But if the dividend increases by 25% a year, in ten years, the dividend will grow from $2.80 to $26.08 by my calculations. At the current stock price of $91, that works out to to a dividend yield of 28.7% Don't believe it? In 2001, MCD paid $0.225 per share, ten years later it was $2.53. Now you're probably thinking, "That's a big 'IF' there" and you're right. However, think of the economic tumult since 1977. Those weren't all good times and yet the earnings and dividend kept growing.
MCD also boasts one of the highest operating profit margins and net profit margins in the industry. I'm impressed with the sheer dominance and global reach of the company and its willingness to adapt to local cultures. Only in India would a vegetarian McDonald's have a prayer of surviving (OK, maybe San Francisco, too). The company is focusing on its brand and developing menu items and marketing plans to bolster same store sales. This past August, same store sales increased 3.7% after an underwhelming July. By and large, August sales growth exceeded that of its competitors. Debt is under control. The downsides include a PE of 17.1 and a PEG of 1.78 making MCD a tad expensive. Other concerns include a generally slowing world economy and rising food prices. MCD is undertaking a share repurchase program, so that should help boost earnings per share. It's a big company with a management team that so far does not appear to be resting on its laurels. I like it.
Years ago my relatives bought and held AT&T and I'm grateful. Hopefully, my grandkids will look back and be glad I made this McDonald's investment for them and me. I'll be watching the stock carefully.
dylan588 owns shares of AT&T and McDonald's. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.