"How do I invest in a company whose shares are most likely to
The answer is really the Philosopher's stone of investing.
Therefore, it's no surprise we frequently field the question (or
a variation of it) at
In my sphere of the investing universe, which is moored to
income, there is one answer. I say that because I know of no
better catalyst, no better indicator of future share performance
than this - the dividend.
As the dividend goes, so goes the share price.
When speaking or writing about dividends, I lean on
High Yield Wealth
to amplify a point:
dividend growth drives share price
. McDonald's is a premier dividend grower. Its annual
dividend payout has increased every years since 1976.
As the below graph reveals, the share price invariably trends
along with the dividend.
McDonald's Share Price/Dividend Payout Correlation
The dividend/share-price correlation is apparent from a
historical perspective. But
is about were you're going, not where you've been.
A rational investor is more interested in
dividends, not past dividends. The question then becomes, what
variables do I vet to increase the probably of investing in a
first-rate dividend grower? After all, a first-rate
dividend grower is a first-rate share-price grower.
Cash is the starting point. A company can't pay a dividend if
it lacks cash. So, start with cash flow, operating cash
flow in particular. If a company can't generate cash selling its
goods or services, then what's the point?
McDonald's continually churns sales into positive cash
flow. Recent annual reports - 2012, 2011, 2010 - show the
Golden Arch's operations generated over $6 billion in cash each
year by exchanging hamburgers (etc.) into currency units. The
dividend in 2012 consumed less than half the annual take, $2.9
billion, of those units.
Debt also matters. A lot of debt consumes a lot of cash in
interest and principal payments. A company can generate a lot of
cash in its operations, but you don't want too much of that cash
diverted to debt holders. More money used to service debt means
less money used to pay dividends to shareholders. I
generally prefer a debt-to-equity ratio below 50%.
McDonald's is around 40%.
I also like a dividend-payout ratio that's 50% or lower.
A company that pays less than 50% of its earnings as dividends
has wiggle room to grow the dividend.
McDonald's payout ratio is a little on the high side - falling
between 50% and 60%. I give McDonald's a mulligan here because of
its formidable brand and track record. I'm willing to overlook a
higher payout ratio.
A formidable brand leads to secure
. I expect McDonald's payout to increase year after year at a
high single-digit rate. I also expect McDonald's share
price to appreciate at a similar rate.
Single-digit dividend growth combined with single-digit
share-price appreciation equals double-digit returns.
McDonald's is a terrific company and a dependable dividend
grower. But finding the next potential dividend grower is
what piques my interest.
We added such an investment to the
High Yield Wealth
portfolio this June. This company generates gobs of cash,
and it has no debt. It paid its first dividend in 2012; the
dividend consumes less than 30% of earnings. Cash per share is
$3.67, which is 15 times more than the annual dividend
We believe this company has the ability to grow its dividend
by leaps and bounds. When it does, the share price is sure
to follow. Indeed, the share price is already up 40% since our
initial recommendation. Such is the influence of dividends,
and the expectation for more dividends on a company's share
Are you interested in learning more about this powerful
indicator and other share-price catalysts? Tune in this Thursday,
February 20, at 2:00 pm ET to an invaluable teleconference hosted
by my colleagues Tyler Laundon and Chris Preston titled "
100% Returns: A Strategy for Consistent
." Tyler and Chris reveal the catalysts that lead to
share-price appreciation (hint: dividend-growth is one).
Best of all, the teleconference is FREE.
Reserve your spot today