McDonald's too expensive?

[bobbyboy1970]

What do you guys think about McDonald's? I know it has been a big winner over the years, but it has had such a run up lately I am a little scared to jump in.

[Kerim]

Yeah. It is tough to put new money in at highs. I think MCD is near both 52-week and all-time highs. Here is the beauty of an excellent dividend growth stock, though:

The first time I ever bought MCD was in August of 2011. I paid $82.71 per share at that time. That sounds pretty good right about now, considering that it closed today at over $98 per share, right? Having paid $82.71 per share, $98 buck just feels way too expensive.

But guess what? In August of 2011 when I paid $82.71 per share, MCD was paying $2.44 in dividends annually, giving me a yield of 2.95% at my purchase price. Since then, they have raised the dividend a healthy amount -- it now pays $0.77 per quarter, or $3.08 per year. At today's close of $98.53 per share, that $3.08 works out to a dividend yield of 3.14%.

Think about that carefully. What that means is that -- relative to the income stream from dividends -- MCD is cheaper today at $98.53 than it was in August 2011 at $82.71. If you focus on the income stream that you are purchasing with your newly invested capital, rather than just on the share price, it can be clear that new highs don't matter so much.

I personally think that McDonald's is going to keep selling burgers and fries through good times and bad. I think the company is going to have good years and not so good years, and the stock price will be tough to predict. But I would not be afraid to start a long-term relationship with the company at these prices, because I think they will continue to generate good cash flow and earnings to pay and continue to increase the dividend.

If you are still daunted, break your investing into smaller pieces. Buy a few shares now, and if it comes back down a bit, buy some more, lowering your average price per share.

Best of luck!

[Trevor]

Wow kerim, that is a very detailed explanation on why Mcdonalds is worth investing on. This forums are really going to pick up with such great advice. Thanks!

[bobbyboy1970]

(03-21-2013, 10:52 PM)Kerim Wrote: MCD is cheaper today at $98.53 than it was in August 2011 at $82.71.

You can't really call it cheaper today than if you bought at $82. If you bought before at $82, you still get today's $3.08 in dividends, so you are way ahead as compared to buying today at just shy of $100.

[Kerim]

(03-22-2013, 03:36 PM)bobbyboy1970 Wrote: You can't really call it cheaper today than if you bought at $82. If you bought before at $82, you still get today's $3.08 in dividends, so you are way ahead as compared to buying today at just shy of $100.

Well, sure. I don't mean to suggest that I didn't get in at a good time or that I'd rather pay $99 than $82 for the same stock and dividend. So far it seems that my purchase is working out, both from a capital gains perspective and from a dividend perspective.

But your original question was about whether it is a bad idea to buy MCD now, after the recent run up. All I am pointing out is that from at least one perspective, the stock is a better value today than back in late 2011, even though you could have picked it up cheaper then. And that is accurate. I'll restate it: For every dollar you put into MCD today at a price of $99 per share, you receive more dividend income than for each dollar when I bought the stock at $82. Today you get a yield above 3%, while back then the yield at purchase was less than 3%.

Since you don't have a time machine (I'm assuming!), all you can do is look at the conditions prevailing today and make a go / no go decision. What I am saying is that from a dividend yield perspective, I would not be put off by the recent run up in price. Now, of course dividend yield fluctuates with price. If you have a look at this chart, you'll see that the yield of MCD has been higher and lower than today. And of course, this is only one of very many factors to look at before making a purchase decision.

But as a very general matter, with a high-quality dividend growth stock like MCD, over a long time horizon, it is reasonable to expect the share price to increase along with the dividend payout, such that the dividend yield stays more or less in something of a range. Outside of a temporary and market-wide shock, MCD's yield is unlikely to get up to 5 percent, because as the payout rises, more people will buy it, bidding up the price. So don't be scared of new highs in a quality DG stock. It may just mean that the price is following the dividends, as it should.

[TomK]

(03-22-2013, 08:41 PM)Kerim Wrote: But as a very general matter, with a high-quality dividend growth stock like MCD, over a long time horizon, it is reasonable to expect the share price to increase along with the dividend payout, such that the dividend yield stays more or less in something of a range. Outside of a temporary and market-wide shock, MCD's yield is unlikely to get up to 5 percent, because as the payout rises, more people will buy it, bidding up the price. So don't be scared of new highs in a quality DG stock. It may just mean that the price is following the dividends, as it should.

Wise words. This is the real magic of DG investing, which I think is poorly appreciated. When you tell some people you're into dividend growth, they assume you only care about the income stream and that you don't care what happens to the stock price. That is not entirely false, but it misses the point that by carefully choosing stocks that are able to grow earnings and dividends consistently, I've also put myself in the best possible position to benefit from share price gains as well. As the earnings and dividends increase, the stock price will come along for the ride. MCD is a perfect example of this. It is not a short term strategy, though!

[KeithD]

If you are sticking your money in MCD for the next 10+ years then it doesn't really matter how the market is now, as you will average out the bumps in that time. You could wait for a dip and then get in to make a little extra.

Anything that hits a peak will always at some point drop, but as long as the overall long term trend is pointing upwards I wouldn't worry about it, and with this company, as long as we have kids it is going to do well.

[bobbyboy1970]

Ok, ok. I think I see the point you guys are making. I am new to putting money into individual stocks, and it makes me pretty nervous. Maybe I'll dip a toe in the water.

By the way, I tried those new McFish bites the other day. Blah. I hope they are betting the company on those!

[Anderson]

Mcdonalds is kind of a safe bet for anyone looking to invest in stock. Like Kerim said, they will continue to generate enough to remain afloat.

[bobbyboy1970]

Mickey D's closed over $100 today! And I still haven't bought yet. Maybe I'm not cut out for this kind of investing.

[TomK]

(04-02-2013, 03:16 PM)bobbyboy1970 Wrote: Mickey D's closed over $100 today! And I still haven't bought yet. Maybe I'm not cut out for this kind of investing.

Perhaps not -- and that would be truly valuable information. "Know thyself" is perhaps the best investing advice of all.

However, if you are still considering an investment in MCD, read this whole thread again carefully, and repeat the following to yourself over and over: MCD is a great company and still yields over 3%.

Could there be a pullback soon that provides you a better entry point? Absolutely. Could it run steadily higher from here? Absolutely. Other than ups and downs, you can't take anything for certain in the markets. Except perhaps this: sometime later this year, MCD will announce another in a long string of annual dividend raises. That raise will increase the value of the investment you make today, and will contribute to the long-term upward pull on the share price.

But listen, if you are so fixated on MCD being near its historical highs, why not look at some other stocks that are not? There are plenty of good names to choose from. Why not get your feet wet with a few shares of MO? or COP? Or, for that matter, just buy 5 or 10 shares of MCD. Sure, it is not super-efficient from a commissions standpoint. But maybe owning just a few shares will let you get comfortable with the ups and downs of ownership -- while limiting your downside. Then if the price does dip, you can pick up a few more and lower your average price.

Good luck!

[Trevor]

I feel like im sold on MCD it seems like a very safe play but I believe this is my kind of move for now that I'm still green regarding the stock market.