3 Top Dividend Stocks in the Restaurant Industry

By Demitrios Kalogeropoulos Markets Fool.com

Dividend stocks outperform their non-dividend-paying peers over the long term, and that's why many investors try to tilt their portfolio toward companies that pay out a regular dividend.

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Below, we'll look at a few of the biggest restaurant specialists that promise income investors a steady stream of cash returns. Read on to find out why Starbucks (NASDAQ: SBUX), McDonald's (NYSE: MCD), and Cracker Barrel (NASDAQ: CBRL) deserve a place on your watch list.

Image source: Getty Images.

Top dividend stocks in restaurants

Company

Market Capitalization

Dividend Yield

Payout Ratio

Cracker Barrel

$4 billion

2.9%

54%

McDonald's

$120 billion

2.5%

65%

Starbucks

$87 billion

1.6%

45%

Data source: Yahoo! Finance.

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Dividend growth: Starbucks

Coffee giant Starbucks has mostly missed out on the recent stock market rally, with shares currently sitting at about where they were in late 2015. Despite solid sales growth lately, investors are growing concerned that slowing shopping trends in the broader retailing industry will pressure its results. After all, if customers are choosing online purchasing over trips to malls and department stores, then they'll be fewer occasions to drop into a Starbucks cafe. The company's latest report of flat customer traffic only added to that concern.

The worries are likely overblown, though. Starbucks sees the potential to expand its store base by 50% over the next five years, with a heavy focus on international growth in markets like China. The U.S. segment stands to benefit from a world-class digital ordering program, too, even as the broader business is lifted by a booming packaged goods segment.

Starbucks believes it can improve earnings by between 15% and 20% each year through 2021 and, with a current payout ratio that's below 50%, those gains should translate into market-beating dividend growth ahead.

Predictable profits: McDonald's

Dividend investors already know McDonald's as one of the most efficient cash-generating machines on the market. After all, the fast food titan's heavily franchised business model allows it to turn its dominant global brand into predictable streams of royalties, rent, and fees that tend to hold up well even during weaker markets.

Image source: Getty Images.

That attractive setup is the reason why McDonald's has the most impressive dividend streak in the industry. It has raised its annual payout in each of the last 41 consecutive years, making it the only restaurant stock that's also a Dividend Aristocrat.

Mickey D's business has lost market share over the past few years, and so investors buying the stock today should feel comfortable with its operating plan to recover through menu improvements and new offerings like home delivery. On the financial side, the company aims to keep its earnings churning higher by refranchising a greater portion of its restaurant base over the next few years so that profits rise at the expense of revenue growth.

Earnings with a retailing kick: Cracker Barrel

Cracker Barrel represents a unique bet in the industry, since one-fifth of its sales come from its retailing operations. The sit-down restaurant chain has more going for it than just diversity, though.

Operating margin has improved in each of the last five fiscal years, rising to 9.6% of sales from 6.9% in fiscal 2011. Cracker Barrel executives expect that trend to continue in 2017, when margin is set to hit a new high of 10.5%.

The industry slowdown has hurt the business, and investors will want to keep a close eye on customer traffic for signs that the worst is yet to come. That scenario isn't showing up in the latest figures, though, which showed a 2% traffic drop but also a near-3% increase in average spending. Ideally, the company would be posting increases on both metrics, but it's impressive that Cracker Barrel can pass on price increases without sacrificing too much of its traffic volume.

As for its dividend, the payout has soared from $0.88 per share in 2012 to $4.45 per share last year. Management also chose to reward investors with a special dividend in each of the last two years of $3 per share and $3.25 per share, demonstrating Cracker Barrel's commitment to a fast-growing payout.

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Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.