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McDonald's vs. Starbucks: Which Is the Better Dividend Play?

Both firms offer intriguing dividend opportunities, but Starbucks is likely to provide a choppier ride.

R.J. Hottovy: The restaurant industry has been going through a number of changes in the past several years, and it's not just things like delivery, mobile orders, and healthier menu options. 

Over the past five years, franchise ownership in the quick-service restaurant space has increased from 80% to 96% as companies have sold locations of franchisees, taken on additional debt, and returned the proceeds to shareholders in the form of larger buyback programs and dividend hikes.

Not surprisingly, the restaurant space has become a more popular space for dividend investors. But what is the best bet in the space for dividend investors? Let's look at two names today: McDonald's and Starbucks.

McDonald's is the world's largest restaurant company based on systemwide sales, with $91 billion in sales at its company-owned and franchise restaurants during 2017, or roughly 4% of the $2.5 trillion global restaurant industry. Starbucks is the largest specialty coffee chain in the world, with roughly $31 billion in systemwide sales.

Both names are currently trading at a discount to our fair value estimate, which is $190 per share for McDonald's and $64 for Starbucks. Restaurant industry trends could be choppy over the next several months because of the ripple effect from Amazon-Whole Foods and aggressive countermeasures by grocers and as well as restaurant chains. 

We believe both of these names offer intriguing dividend plays. McDonald's is expected to pay a dividend of almost $4.20 per share in 2018, representing a payout ratio of 55% and a yield of 2.5%. Starbucks is expected to pay $1.25 per share, representing a payout ratio of 40% and a yield of 2.5%. 

Which is the better dividend play? We believe it all depends on your risk tolerance.

We believe Starbucks has the higher dividend growth potential, with our model forecasting midteens dividend per share growth over the next five years. However, earnings have the potential to be choppier at Starbucks over the same period as the company works to improve its digital platform, adds new menu innovations, and makes changes to its store base to maximize throughput potential.

McDonald's on the other hand, will likely see dividends grow at a slower pace, with roughly 10% growth the next few years before fading the to high single-digit range. However, with its franchisees owning 93% of McDonald's locations and responsible for a sizeable percentage of capital requirements at the store level, McDonald's dividend is likely to be more stable over the same period.

R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.