Consumers scale back their discretionary spending during recessions or economic downturns, which often includes their restaurant spending as well. Not all restaurants are affected in the same way, howeer, and some might even benefit from consumers dining at lower-priced restaurants instead of the higher-priced restaurants they usually frequent.

McDonald’s Corporation (MCD) is not only the global leader in the restaurant industry, it also has an excellent recession track record. Its lower-priced offerings that are affordable during recessions, combined with its global scale that gives the company geographic diversification, should allow it to perform well during future recessions.

For these reasons, we believe that McDonald’s dividend will continue to increase each year, even during a recession. This is why we view McDonald's as one of the best dividend growth stocks to hold during a recession.

Company Overview, Recent Results, And Growth Outlook

McDonald’s is the world’s leading restaurant company, operating more than 38,000 locations across more than 100 different countries. It operates company-owned restaurants, but an even larger amount of restaurants are franchised. These franchised restaurants have the benefit of providing profits for the company without requiring meaningful capital investments, as those are paid for by the franchisee. 

McDonald’s reported its most recent quarterly results on October 22. During the quarter McDonald’s achieved an attractive comparable restaurant sales growth rate of 4.8% for its business in the US, and an even better comps sales growth rate of 5.9% globally. McDonald’s company-wide revenues totaled $5.43 billion during the third quarter, and McDonald’s generated earnings-per-share of $2.11, which was up 2% year over year in constant currencies.

We believe that McDonald’s will be able to grow its earnings relatively consistently over the coming years, through a range of contributing factors. Ongoing growth of comparable restaurant sales should be a tailwind, but McDonald’s earnings-per-share should also continue to be driven by the company’s share repurchases. Due to its relatively asset-light business model, thanks to its franchising, McDonald’s can easily distribute most of its cash flows to its owners via stock buybacks and dividends. Since 2008, McDonald’s has grown its earnings-per-share by 8% annually, but we believe that profit growth will likely be a bit lower than that in the future.

The company has performed very well during the last financial crisis, as McDonald’s was able to grow its earnings-per-share by 35% between 2007 and 2009. Due to this strong track record and the fact that McDonald’s food items should be affordable during a recession as well, we believe that the company would not face large headwinds during a future recession, which makes McDonald’s a defensive investment that should be able to eke out some growth even if the economy weakened.

Above-Average Dividend Yield And Dividend Growth 

McDonald’s has increased its dividend in September, bringing the new quarterly payout to $1.25, or $5.00 a year. This results in a dividend yield of 2.5% at current prices, which is more than the S&P 500 Index's dividend yield of less than 2.0%. McDonald’s dividend yield has been even higher in the past, but we nevertheless believe that the company remains a solid dividend growth pick for now.

Thanks to a dividend payout ratio that is not especially high, and since McDonald’s should be able to grow its earnings-per-share relatively consistently over the coming years, dividends should continue to rise in the foreseeable future. McDonald’s has raised its dividend every year for over 40 consecutive years, and it is, we believe, extremely unlikely that this dividend growth track record comes to an end any time soon. We believe that due to these qualities, McDonald’s is an attractive, lower-risk long-term investment from the restaurant industry, especially for dividend growth investors.