How Dividends Change the Game for McDonald's Shareholders

The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Let's take a deeper look at McDonald's dividend-generation skills.

The fast-food giant just reported (link opens PDF) second-quarter earnings, with both sales and earnings falling slightly short of analyst estimates. Management sees tough times ahead in the second half of 2013 but also reminds investors that the company has "succeeded in a variety of operating and economic environments." All told, investors focused more on the negative short-term outlook than on the promise to come back swinging: McDonald's shares fell as much as 3.2% on the news, making it by far the weakest performer on the Dow today.

What's bad for share prices is generally good for dividend yields. At today's prices, McDonald's offers a generous 3.1% yield. That's comfortably above the Dow's average yield of 2.6%, beating all but eight of its 29 Dow peers.

McDonald's is a classic Dividend Aristocrat, having increased its annual payouts in each of the last 37 years. The company just announced another $0.77 per-share payout, staying true to the clockwork-like model of paying the same dividend for four quarters at a time. Expect the next dividend to jump by another 10% or so. That's how McDonald's rolls.

MCD Dividend Yield Chart
MCD Dividend Yield Chart

MCD Dividend Yield data by YCharts.

You can set your calendar by McDonald's dividend increases, and this ultra-reliable policy is fantastic news for investors. Sure, the stock tends to beat the Dow based on rising share prices alone, but the dividend really puts McDonald's over the top.

MCD Chart
MCD Chart

MCD data by YCharts.

Investors who say "no thanks" to 40% higher 10-year returns thanks to a fantastic dividend should just take their nest eggs and retirement portfolios to the nearest casino instead. McDonald's delivers a master class in how to build lasting wealth. And the longer you stretch your investing horizons, the better this stock looks. The annual dividend checks nowadays are larger than the original investment if you bought McDonald's 30 years ago.

McDonald's stock is safe as houses (or even safer, for those who remember the panic of 2008!). This management team isn't kidding around when they say they've seen every market condition in the book. That's the kind of cash machine you can buy on the dips and keep for decades to come. I just started a bullish CAPScall on the stock myself to exploit today's negative overreaction.

If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths...Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. You'll also take an even deeper dive into Mickey D's dividend policies. Click here to keep reading.

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Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+.Motley Fool newsletter services have recommended buying shares of McDonald's. Motley Fool newsletter services have recommended creating a bull call spread position in McDonald's. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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