McDonald's, the only firm serving up income with a side of growth

Times

19 hours ago

How do you fancy having your standard of living cut in half when you are too old to do anything about it? That's the dismal prospect facing many who are preparing for retirement with life savings that lack protection against the insidious effects of inflation — and it's part of the reason why the government is on a drive to get more of us investing.
Even apparently small reductions in the purchasing power of money can have big effects over the 20 years or so that the typical pensioner can expect to spend in retirement. According to the Office for National Statistics, the consumer price index (CPI) measure of inflation was 3.6 per cent over the year to June, while the retail price index (RPI) measure was 4.4 per cent.
You can see why politicians and their public relations people prefer to quote CPI, while the gilt or bond markets — where governments borrow from international institutions — reckon that RPI is a better measure of what's really going on. Either way, if those rates of inflation remained unchanged, CPI would cause the purchasing power of your money to plunge 50 per cent in 20 years, while RPI would do so in just 16 years and four months.
Politicians and everyone working in the public sector need not trouble their heads about any of this, because their defined benefit pensions have inflation protections subsidised by the good old taxpayer. But all of us in the private sector, who must pay for our own retirement with defined contribution pensions, had better think about how we can preserve — or even increase — the purchasing power of our savings.
That's why this 66-year-old DIY investor, unlike most financial journalists, keeps banging on about dividends, or the income that some funds and shares can deliver. It is important to be aware that dividend yields — the income that shares pay, expressed as a percentage of their price — are not guaranteed and can be cut or cancelled without notice.
High-yield investments often entail high risks, as demonstrated dramatically when Houthi rebels recently sank a bulk carrier ship in the Red Sea. Fortunately this was not one of the 20 vessels operated by Tufton Assets, formerly Tufton Oceanic Assets (stock market ticker: SHPP), but the inherent risks of investing in shipping are reflected in the rewards of this top yielder in my Isa, which pays 8.9 per cent income.
It's only fair to add that Tufton shares I bought for 86p in August 2021 cost exactly the same today — so they have achieved no capital growth at all. But, more positively, income from the shares has increased by an annual average of 6.5 per cent over the past five years, according to the independent statisticians at LSEG, formerly the London Stock Exchange Group.
The past is not necessarily a guide to the future. But a high and rising tax-free income does provide two reasons to be cheerful when many other economic indicators make me fearful.
Much the same can be said about Greencoat UK Wind (UKW), a £4.4 billion fund that manages offshore wind farms. This is the second highest yielder in my Isa, delivering nearly 8.2 per cent income, with dividends rising an annual average of 7.6 per cent over the past five years.
If that rate of ascent could be sustained it would double shareholders' income in less than a decade. Less happily, this is another example of the risk that seeking high dividends can lead to low or no capital returns; Greencoat shares I bought for £1.45 in August 2023 now cost just £1.21.
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That's why it could make sense to consider less income today in the hope of more capital growth tomorrow. For example, Ecofin Global Utilities and Infrastructure (EGL) is another self-descriptive investment trust — it yields 3.9 per cent, with dividends rising 5 per cent on the same basis as above.
Neither number is quite as exciting for income-seekers as those mentioned earlier, but Ecofin shares I bought for £1.52 in September 2019, as reported here at that time, cost £2.20 at close of trade on Friday. That helped this fund, focused on a wide range of electricity and gas companies, become the fifth most valuable holding in my portfolio.
Exchange traded funds (ETFs), investment and unit trusts may reduce the risk inherent in stock markets, which is a big worry for pensioners who cannot make up for losses with a bit of overtime or a pay rise. These pooled funds can diminish risk by diversifying our exposure over dozens of different companies, countries and currencies. That should mean they don't all go down at once.
Investing directly in a single business might be more risky but can also be more rewarding. For example, the world's biggest fast food business, McDonald's (MCD), yields 2.4 per cent income, which has risen an annual average of 7.5 per cent over the past five years.
Even more remarkably, it has increased shareholders' income every year since 1976. That makes it what Americans call a 'dividend aristocrat' — a Standard & Poor's share that has raised dividends for more than 25 years.
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Never mind the macroeconomics, I invested 2 per cent of my life savings in McDonald's when I paid $95 in July 2014, as reported here at that time. They cost $298 on Friday, supersizing this shareholding to become the second most valuable among 50 constituents of my forever fund.
This just goes to show that income-hungry investors can have our burger and eat it. Either way, with or without fries, I'm lovin' it.
Short-term share price shocks can create opportunities for long-term investors, and it's better still when dividends pay us to be patient. Consider the world's biggest chocolate maker, whose share price plunged by 13 per cent on the day it unwrapped bad news earlier this month.
Few folk in Britain have heard of the Swiss business called Barry Callebaut (BARN) but many enjoy its produce, which it sells to better-known retail brands including the Cadbury owner, Mondelez, and the KitKat maker, Nestlé.
High cocoa prices following a poor harvest have hit all the above, as more expensive ingredients eat into profits. Just two countries, Côte d'Ivoire and Ghana, produce nearly 70 per cent of the world's cocoa.
Barry Callebaut shares traded above 1,600 Swiss francs last year but I bit into them at SwFr766 in April, as reported here at that time. They had bounced back to SwFr950 earlier this month before another profits warning prompted that double-digit meltdown, when I doubled my stake at SwFr858 on Monday. They traded at SwFr1,016 on Friday.
These shares yield 3 per cent gross dividend income, which has risen by a measly average of 2.2 per cent a year over the past five years. Similarly, Nestlé shares I bought for SwFr65 in March 2014 cost SwFr77 last Monday and yield 4 per cent income, rising by 2.5 per cent a year.
I have no idea what will happen next to cocoa farmers in west Africa, and my sticky fingers may get burnt, but I suspect current share prices will look cheap in future. Short-term volatility is baked in but so is the long-term craving for chocolate.
• Full disclosure: Ian Cowie's shareholdings