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Battle of Dividends: McDonald's vs. Walmart

Daniel Sparks, The Motley Fool

Unlike many growth stocks, dividend stocks can provide investors returns in two ways. Like a growth stock, the per-share value can appreciate over time. But what makes a good dividend stock different from the typical growth stock is its meaningful dividend payments. Through the day-to-day, month-to-month, and even year-to-year volatility that stocks often see, good dividend stocks continue paying solid dividends through thick and thin.

Two companies that exemplify consistency in their dividend payments are Walmart (NYSE: WMT) and McDonald's (NYSE: MCD). These two iconic dividend stocks have not only paid dividends for more than four decades, they've also increased their dividend payments every year since declaring their first dividends.

But which of these two dividend stocks is a better bet for investors' money today? Read on to find out.

A chalkboard sketch of a bar chart highlighting a growth trend.

Image source: Getty Images.

Walmart

Dividend Yield

Dividends/Free Cash Flow

5-Year Average Annual Dividend Growth Rate

2.2%

34%

5.1%

Data source: Reuters and Morningstar and Reuters. Table by author.

Walmart's dividend is solid no matter how you look at it. Not only does the company have a meaningful dividend yield of 2.2%, but the company is notably only paying out 34% of its free cash flow in dividends. This means Walmart's already juicy dividend has plenty of room for growth.

Then there's Walmart's impressive dividend history. The company has paid dividends every year since its first dividend in 1974. Further, Walmart has increased its dividend on an annual basis since its first dividend was paid.

Walmart continues to make dividend increases a priority, boosting its payout by an average of 5.1% every year over the past five years. The company's most recent dividend increase, however, was very small. Walmart increased its dividend by just 2% last year. 

Fortunately for dividend investors, Walmart has recently been serving up strong underlying business growth -- growth that can easily support further dividend increases. Highlighting Walmart's healthy business, adjusted earnings per share rose 19% year over year in the company's most recent quarter.

McDonald's

Dividend Yield

Dividends/Free Cash Flow

5-Year Average Annual Dividend Growth Rate

2.6%

88%

5.9%

Data source: Reuters and Morningstar and Reuters. Table by author.

The one area McDonald's dividend doesn't live up to Walmart's is when it comes to the percentage of cash it is paying out in dividends. The fast-food company is already paying out 88% of free cash flow, leaving less breathing room for its dividend.

But McDonald's dividend is more attractive when it comes to dividend yield and recent dividend growth. At 2.6%, McDonald's dividend yield is well ahead of Walmart's. In addition, McDonald's average five-year growth rate for its dividend of 5.9% slightly outpaces Walmart's dividend growth during this period. Similarly, the fast-food king's 7% dividend increase last year is above Walmart's most recent increase of 2%.

In addition, McDonald's longer-term dividend history is just as impressive as Walmart's, with dividend payments and consecutive annual increases dating back to the company's first dividend in 1976.

Finally, McDonald's business is growing nicely as well. The fast-food restaurant's adjusted earnings per share increased 15% year over year in the company's most recent quarter. 

The verdict

Both of these dividend stocks represent enduring companies with strong underlying businesses and dividend-friendly capital allocation practices, making them each worth further consideration.

But Walmart's recent stronger earnings momentum, combined with the greater wiggle room for its dividend thanks to the fact that it is paying out just 34% of free cash flow in dividends, makes the supermarket retailer's dividend slightly more attractive. Sure, McDonald's has a higher dividend yield. But there's less risk in Walmart's dividend ever taking a hit since the company is paying out a lower portion of its annualized free cash flow in dividends.

That said, this was a close battle.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.