We Just Bought McDonald’s (MCD), Realty Income (O) and Essex Property (ESS) for Our Income Builder Portfolio

I don’t know what it is about round numbers, but they are far more respected and more celebrated than their non-round peers.

Apparently, staying married for 49 years is so easy it’s barely worth mentioning. Fifty years? That’s not only feted with a huge party, but there even is a special name for the occasion: The Golden Anniversary.

The United States’ 199th year as a nation generated a collective shrug. But 1976 — America’s Bicentennial! — was a year-long hype-a-thon. I should know; my red, white and blue golf ball played “Yankee Doodle Dandy” every time I smacked it with my 5-iron.

Tommy John had 288 wins in his wonderful pitching career, yet the only thing he’s famous for is undergoing a groundbreaking surgical procedure. I’m 100% certain that if he had 12 more victories, he’d be in the Baseball Hall of Fame.

It’s the same deal in investing.

As the major stock indexes set record after record this fall, folks said, “Gee, that’s nice.” When the Dow Jones Industrial Average hit 30,000 for the first time on Nov. 24, however, it was as if we suddenly had peace on earth — or at least a cure for the coronavirus.

AP Photo

Lame duck president Donald Trump actually held a news conference so he could take credit for what he called “a sacred number.”

Come to think of it … I do seem to remember reading about Dow 30,000 in the Book of Numbers.

OK, so now it’s my turn to celebrate a “sacred” round number, too.

After we bought shares of McDonald’s (MCD), Realty Income (O) and Essex Property Trust (ESS) on Tuesday, Dec. 8, our Income Builder Portfolio surpassed $2,500 in projected annual income.

SimplySafeDividends.com

As it says in the IBP Business Plan, the endeavor’s Income Target is to:

Build a portfolio that will produce at least $5,000 in annual dividends within 7 years of the IBP’s inception.

Given that the portfolio was born in January 2018 — meaning it hasn’t even reached the end of Year 3 yet — I happen to think hitting our target’s halfway point is worth cheering.

Here were the buys that nudged the Income Builder Portfolio over $2,500:

First, I executed orders for full shares of each company — 1 of Essex, 2 of McDonald’s and 4 of Realty Income. Total cost of those purchases was $911.

With the $89 remaining from Daily Trade Alert’s $1,000 semimonthly allocation, I used Schwab Stock Slices to buy a fraction of a share more of MCD.

The total spend for McDonald’s was $503.49 for 2.4302 shares, which averages out to $207.18/share.

As I explained in my previous article, it had been so long since we initiated our position in the company that it was past time for the IBP to take another bite of Mickey D’s.

Dishing Out Divvies

The purchases added about $32 to the IBP’s expected annual income production (yellow area of the table below). The three companies will combine to bring in more than $150 in dividends over the next year, about 6% of the portfolio total (green area).

Simply Safe Dividends gives each company a solid “safety” score: 93 (very safe) for ESS, 77 (safe) for MCD and 70 (safe) for O.

McDonald’s and Realty Income each will pay its next dividend on Dec. 15 — $11.28 for MCD and $4.97 for O. As per portfolio rules, those divvies will be reinvested right back into the companies, a process informally known as “dripping.”

The IBP will receive $11.73 from Essex on Jan. 15. Realty Income, the IBP’s only monthly dividend payer, will generate about $5 more that day, as well. Those dividends also will be dripped.

That’s how our income stream — $2,500 strong and counting — is getting built. And that’s why we named this project what we did. (See the entire portfolio HERE.)

Valuation Station

Dozens of analysts cover these companies, and here is what they are projecting for McDonald’s, Realty Income and Essex Property Trust:

* An often-used valuation metric for real estate investment trusts (REITs) such as O and ESS is the ratio of price/adjusted funds from operations (P/AFFO), rather than price/earnings (P/E).

Only a few of the above numbers get my green “most favorable” designation. McDonald’s seems to be the most attractively valued (though hardly cheap), while Essex appears to be the priciest.

About 77% of analysts surveyed by Reuters rate McDonald’s either a Strong Buy or a Buy.

With Realty Income, approximately 61% of analysts recommend buying the stock.

As far as Essex is concerned, most analysts rate it as a Hold. Two even say it’s time to sell; I obviously disagree with them.

Finally, let’s take a look at the FAST Graphs valuation illustrations for each company.

McDonald’s has a “blended P/E ratio” of 33, but that’s a little deceptive because it brings into account past losses due to the COVID-19 pandemic. The company is expected to rebound strongly, with a 34% earnings gain for 2021, followed by 8% more in 2022 (yellow highlight).

Using the 2021 estimated EPS of $8.31, McDonald’s 25-ish forward P/E is not all that far above its historic norm.

Realty Income is trading fairly close to its normal P/AFFO ratio. Unlike McDonald’s, which will see an earnings decline this year, O is expected to see a slight gain in funds from operations (blue circle). Also unlike MCD, Realty Income has lower growth in the forecast.

Using the data from the table at the top of this valuation section, Essex looked quite overvalued. FAST Graphs, however, tells a different story, as the company’s blended P/AFFO actually is about 12% below its norm.

As is the case for its fellow REIT, Realty Income, not much growth is forecast over the next two years for ESS as it tries to recover from the pandemic.

Wrapping Things Up

Obviously, I’m happy that our Income Builder Portfolio has hit the $2,500 mark, and that it is well ahead schedule to meet its 7-year target.

Even more satisfying: I didn’t “reach” for income in pursuit of this round number or any other milestone.

We own four companies yielding 1% or less, eight more between 1% and 2%, and only nine with yields of at least 4%. Our overall portfolio yield is only 2.75%; heck, there are Dividend Growth Investing practitioners who won’t buy any company under 3%.

By stressing quality — including the latest additions to our McDonald’s, Realty Income and Essex Property Trust positions — we have created a reliable, growing income stream. The IBP’s total return (about 25%) has been plenty impressive, too.

Add it all up and yes, it definitely is something to celebrate.

— Mike Nadel

This article first appeared on Dividends & Income

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