Battle of Dividends: McDonald's Corporation vs. PepsiCo Inc.

By Markets Fool.com

McDonald's (NYSE: MCD) and PepsiCo (NYSE: PEP) have both been known as excellent dividend stocks for decades. McDonald's has paid a dividend each and every year since 1976, and Pepsi has paid dividends for 44 years straight. What's more, both companies are known for religiously increasing their dividends annually. But which stock's dividend is better?

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Image source: Getty Images.

To identify the better stock, here's a head-to-head comparison of McDonald's and Pepsi.

McDonald's

Company

Dividend Yield

Payout Ratio

5-Year Dividend Compound Average Growth Rate

5-Year EPS Compound Average Growth Rate

McDonald's

3.2%

66%

8.8%

0.1%

Data source: Reuters.

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One of the first things dividend investors considering McDonald's stock will notice is that it has a very solid dividend yield of 3.2%. This yield easily exceeds the 2.2% average dividend yield of stocks in the S&P 500. Furthermore, it edges out Pepsi's dividend of 3%.

Looking beyond the current dividend yield McDonald's stock offers today, there's a good chance dividend payouts will increase in the coming years. After all, the company has demonstrated both its willingness and ability to boost its dividend by increasing it at an average rate of 8.8% annually for the past five years.

But if McDonald's 5.6% dividend increase in 2016 and its 4.7% increase in 2015 are any indication of how annual dividend increases will trend in the coming years, investors shouldn't expect the fast-food giant to return to its average 8.8% dividend increase rate. McDonald's lower dividend increases lately are likely related to the company's anemic average annual EPS growth of 0.1% during the past five years.

PepsiCo

Company

Dividend Yield

Payout Ratio

5-Year Dividend Compound Average Growth Rate

5-Year EPS Compound Average Growth Rate

PepsiCo

3%

64%

7.9%

(1.3%)

Data source: Reuters.

Pepsi's dividend yield of 3% falls short of McDonald's 3.2% dividend yield, but the soft-drink and snack company's dividend stands out when it comes to growth prospects.

Sure, Pepsi's five-year average annual dividend increase of 7.9% is slightly behind McDonald's average increases during this period, but there are two good reasons Pepsi's dividend increases over the next few years may exceed McDonald's. First, Pepsi's payout ratio, or dividend payments as a percentage of earnings, is slightly lower than McDonald's, at 65%. Second, Pepsi's recent dividend increases have been more aggressive than McDonald's. In both 2015 and 2016, for instance, Pepsi increased its dividend by about 7%.

But, like McDonald's, Pepsi has struggled to grow its EPS during the past five-year period. During this time, EPS actually declined at an average annual rate of 1.3%. So, similar to what an analysis of McDonald's dividend revealed, Pepsi investors may not want to expect dividend increases to remain at these levels in the coming years.

Image source: McDonald's.

So, which company's dividend is better? While Pepsi comes out slightly ahead of McDonald's on dividend growth prospects, McDonald's may be the better bet for dividend investors overall because of its higher dividend yield.

Furthermore, as a nice bonus, McDonald's has been demonstrating promising improvements lately, suggesting its earnings growth could pick up. The fast-food giant's operating margin, for instance, increased 260 basis points year over year in its most recent quarter as the company benefited from improved restaurant efficiencies. Pepsi, too, has seen an upswing in operating efficiencies lately, with its operating margin on pace for a 50-basis-point improvement for the entire year of 2016 compared to 2015. But McDonald's higher dividend yield and sharp operational improvements lately give it the slight win over Pepsi, making it the better dividend stock.

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Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends PepsiCo. 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.