For many people, $500 isn't a huge amount of money. But it could help set the stage for epic returns in the stock market, if put into the right companies for the right amount of time.
Let's explore how McDonald's(NYSE: MCD) and Vector Group(NYSE: VGR) could create long-term value for shareholders because of these companies' recession-proof business models and sustainable dividend payouts.
1. McDonald's
If you are a new investor, the last thing you want to do is lose money by taking too much risk. And that's where McDonald's comes in. With almost 70 years of history, this blue chip restaurant giant has an exceptionally strong economic moat, which make its operations sustainable. Its modest dividend yield is icing on the cake for long-term investors.
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Coined by investing legend Warren Buffett, the term economic moat refers to a company's ability to maintain a competitive advantage over rivals in its industry. For McDonald's, this comes down to its brand. With more than 38,000 locations in over 100 countries, it is the biggest, most recognizable fast-food chain globally. Its success can be credited to its franchise business model, which allowed it to expand quickly and bring in a network of motivated small business owners to run most of its locations.
McDonald's is a mature company, so investors shouldn't expect rapid long-term revenue growth. But its operations are relatively stable and recession proof because of its low-priced menu options and the fact that it gets much of its revenue from rents charged to its franchises (because McDonald's owns the real estate). The strategy shifts much of McDonald's operational risk to the franchise owners.
With a yield of 2.26%, McDonald's dividend isn't groundbreaking. But it has increased the payout annually for an impressive 21 years straight.
2. Vector Group
Up 8% during the last 12 months, Vector Group has demonstrated its resilience in periods of economic uncertainty and inflation. The company looks poised to continue its outperformance because of its low-priced products and impressive dividend.
A Bloomberg survey puts the likelihood of a U.S. recession at 70% over the next 12 months. But the tobacco industry is somewhat shielded from this because, as an addictive product, demand tends to hold up well, even in a bad economy.
Vector Group takes this natural advantage a step further by focusing on the lower end of the market. Its wholly owned subsidiary, Liggett Group, commands a 60% market share in discount cigarettes and 40% in the even cheaper deep-discount offerings.
In a downturn, customers may turn to these products over higher-priced alternatives, keeping Vector Group's top line stable. So far, the company's operations are holding up well. Revenue jumped 26.6% to $378 million on the back of high cigarette sales volume. The stock also boasts a dividend yield of 6.44% -- over triple the S&P 500 average of 1.74%.
Which company is better for you?
Vector Group and McDonald's boast reliable, consistently profitable operations. But they might serve different investment strategies. As an industry leader in the large, well-established fast-food business, McDonald's looks like the safer bet.
Vector Group is a much smaller company in a more uncertain industry from a regulatory standpoint. But it compensates for this with a significantly higher dividend yield.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
