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Retirement picks: 4 restaurant stocks with dividends

Part 4
Retirement picks: 4 restaurant stocks with dividends (Part 4 of 9)

Must-know: Yum! Brands has increased dividends by ~14% every year

Yum! Brands’ dividend yield lower than McDonald’s

Yum! Brands Inc. (YUM) currently trades at ~$72.28. Recently, the company raised its quarterly dividend from $0.34 to $0.37 a share. Like McDonald’s Corp. (MCD), Yum! Brands has historically announced dividend increases around this time of year. The 10% dividend increase is higher than McDonald’s 5%, but Yum’s dividend yield of 2.05% is lower than McDonald’s 3.30%.

Yum! Brand's Dividend History 2013-09-24Enlarge Graph

Historic growth has been better than McDonald’s

Yum! Brands Inc. (YUM) also boasts a dividend growth unmatched by McDonald’s Corp. (MCD)’s. Since starting the program in 2004, the company has been increasing dividends every year—a reflection of solid earnings growth. For the past four years (counting from the end of 2013), the company has been increasing its dividend by a compounded annual rate of 14.50%. The compounded annual rate is a measure analysts often use to show how fast a metric was growing if it repeated that growth every year over a period.

Yum! Brands Inc. (YUM)’s dividend growth is much higher than McDonald’s, but it follows a similar growth pattern to its closest peer. From 2004 to 2009, Yum’s earnings were rising at a rapid rate of around ~13% every year, driven by expansions and solid sales growth—primarily in its KFC and Pizza Hut business overseas, which had offset slight declines in US performance. While dividend growth rose as the global economy recovered from a recession in 2009, it nonetheless fell afterwards, as globally weak unemployment negatively affected performance.

Yum! Brand's Dividend Coverage 2013-09-24Enlarge Graph

Rapid historic dividend growth also driven by increased payout

The rapid dividend growth, however, was also driven by increased payout to investors from the company’s earnings. While only representing 12% of earnings and free cash flow in 2004, it tripled to 35% in 2009. Since then, it has stayed constant. Likewise, analysts used the past four years of data to derive an average annual growth, which is more likely to represent future dividend growth. We can attribute last year’s (2012′s) increase in dividend over free cash flow to a ~50% increase in capital expenditure in China—which accounts for 50% of the company’s revenue and should drive future earnings.

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