1 magnificent 3% S&P 500 dividend stock to buy and hold forever

The rising market has raised the valuation of dividend stocks in 2024 and at the same time reduced their yields. These trends have made it harder for income investors to find attractive values. The S&P 500which is full of quality dividend payers, is up 21% through the end of September and has gained just 1.3%.

Dividend investors can do better than that.

There is one member of that index that is priced at about the same level as when 2024 began. Its shares also currently pay a 2.3% yield. Sure, the business is going through a tough time right now as shoppers spend more cautiously on fast food. But patient investors should do well by holding McDonald’s (MCD 0.10%) long term stock. Here’s why.

Soaked French Fries

McDonald’s gave investors heartburn in its latest earnings reports, which showed stress on its main fast-food business. Guest traffic fell in the second quarter, management revealed in late July, leading to a rare decline in comparable-store sales (comp.).

That’s not really a surprise. Customer traffic has slowed for several quarters, but was offset by the chain’s higher prices in 2023. The price-to-inflation hike appears to be over, however, leaving Wall Street worried about what will trigger the next growth cycle.

Management added to these concerns by describing a challenging sales environment. “Consumers are more discriminating about their spending,” CEO Chris Kempczinski said in a press release in late July.

Investors still seem to be reacting to the slowdown in 2024. Keep in mind that McDonald’s had a meteoric rise a year ago, up 12% in the second quarter. The latest 1% drop isn’t as troubling in this context. The company generates plenty of revenue from franchise fees, rent and royalties, helping to explain how consolidated sales are still setting records even as guest numbers decline.

FINANCES

And you’d be hard-pressed to find many companies that are as financially strong as McDonald’s. The burger slinger generated operating cash flow of $4.1 billion in the first six months of 2024, translating to 32% of sales. Profit margin reached 45% of sales in the period, down only slightly from the record high of 45.5% in mid-2023.

As you might expect, Mickey D’s dividend is well covered by those ample earnings, meaning investors can count on the payout to grow, as it has for each of the past 48 years. The chain is now on the verge of joining the exclusive club of Dividend Kings (companies that have collected annual dividends for 50 or more consecutive years).

In the meantime, the stock is likely to struggle with weaker returns, at least until sales growth trends return. McDonald’s has a lot of leverage in this regard, including increasing its value propositions and launching limited-time offers. It dominates the drive-thru segment, which has become more popular among fast-food fans, and its home delivery platform can also increase sales.

Investors can take advantage of the pessimism surrounding this business to pick up McDonald’s shares at an attractive price. The stock is valued at 26 times earnings, or about half of Chipotlehis assessment. It’s true that McDonald’s doesn’t have nearly the momentum that the Tex-Mex chain enjoys today. However, there is a good chance that it will return to a more normal growth cadence in the coming quarters.

Meanwhile, investors can collect a solid dividend that’s backed by some of the strongest profits in the fast-food industry. This is a recipe for great long-term profits here.