If You Like Chipotle and Its Stock Split, Then You'll Love These 2 Dividend Stocks | The Motley Fool (2024)

Chipotle Mexican Grill (CMG -0.41%) captured the spotlight recently with its announcement that it will issue a 50-for-1 stock split. The makes sense given that the stock recently achieved a new all-time high of over $3,000 a share (before slipping back slightly).

Here's why Chipotle and two other leading restaurant, food, and beverage dividend stocks are all worth buying now.

Chipotle is an excellent story with room to run

Chipotle has growth -- plain and simple. Its top line continues to grow at a breakneck pace, but it's the company's margins that have really improved in recent years. Chipotle now has roughly the same operating margin as Starbucks but is growing at a far faster rate.

However, unlike other restaurant chains, Chipotle doesn't pay a dividend because it prefers to pour profits back into the business. This bold strategy can amplify gains, but it also puts pressure on the investment thesis when there's a slowdown.

CMG Revenue (TTM) data by YCharts

What's more, Chipotle is a very expensive stock -- especially for its size and industry. It currently trades at a price-to-earnings (P/E) ratio of nearly 66. Granted, the forward P/E is a bit lower at about 55.

Analysts' consensus estimates call for $64.78 in fiscal 2025 earnings per share (pre-split) -- which would imply 21% growth compared to fiscal 2024 expectations of $53.45 per share.

If Chipotle keeps growing its bottom line by 15% to 20% per year, then its expensive valuation could start to look much more reasonable over time. But there's no denying the stock is priced to perfection and should only be considered by investors who believe in the company's sustained growth and have a multi-year outlook.

McDonald's has a near-perfect business model

Chipotle isn't a terrible buy, but McDonald's (MCD 1.43%) could be even better. For one, investors are getting the chance to buy McDonald's at a 24.5 P/E, a discount to its five-year median P/E of 27.1.

McDonald's has been raising its dividend at a fairly rapid rate. The current quarterly dividend is $1.67 -- roughly double what it was 10 years ago. In October, McDonald's raised its dividend by 10%, which is a sizable increase for a company of its size. The raise puts McDonald's on track to become a Dividend King by 2026.

McDonald's has an underrated business model. Unlike Chipotle, which owns and operates all its U.S. locations, 95% of McDonald's locations worldwide are franchised. McDonald's owns the real estate and collects rent revenue, royalties, franchise fees, and more. The company's structure makes its brand and the perceived revenue that franchisees can generate over time more important than its short-term performance or even the business cycle.

MCD Shares Outstanding data by YCharts

McDonald's may not have Chipotle's growth, but it's a better investment if you're looking for consistency. The company has an extensive track record of rewarding its shareholders. As mentioned, the dividend has roughly doubled over the last decade, but it's the entire capital return program that really stands out.

Over the last decade, McDonald's has bought back over a quarter of its outstanding shares, which illustrates the effectiveness of its business model and how it rewards shareholders using dividends and buybacks on top of potential capital gains.

In sum, McDonald's has it all, and is worth buying now.

co*ke offers a compelling, reliable yield

Coca-Cola (KO 0.94%) hasn't bought back shares at nearly the rate as McDonald's. And it doesn't have as good growth prospects as Chipotle or McDonald's. However, what co*ke has is stability and the ever-important quality of not overextending itself.

co*ke was instrumental in globalizing soda. But today, the company is mature. There's only so much it can do to grow without overspending. To its credit, it has made measured and mostly effective acquisitions. It has also stayed almost entirely within its core competency of nonalcoholic beverages, which is far different from a company like PepsiCo, which owns Frito-Lay, Quaker Oats, and plenty of other brands across product categories.

When the market has a bad year, co*ke tends to outperform. But when the market has a great year, co*ke usually underperforms. Unsurprisingly, co*ke has underperformed because the market has done very well in recent years.

The ideal way to invest in co*ke isn't because you're trying to beat the market, but because you want to limit downside risk and collect passive income. Nothing is guaranteed in the stock market, but co*ke is about as close as it gets to predictability. The company has raised its dividend for 62 consecutive years.

The stock yields 3.2% -- which is quite a bit higher than other reliable Dividend Kings. co*ke's reliability is one of the reasons why Warren Buffett-led Berkshire Hathaway has owned the stock for over 30 years.

Something for everyone

It's easy to get enamored with a growth story like Chipotle, especially when the entry point (without fractional shares) becomes lower, thanks to a stock split. However, to have the conviction to hold a stock over time, it's essential to invest in companies you understand and that align with your investment objectives.

Chipotle's lack of a dividend and its lofty valuation won't appeal to everyone. If you're more income and value oriented, McDonald's and co*ke could be better choices.

But if you're a balanced investor, then picking up shares of all three stocks is a great way to get a bit of growth, value, and income.