Few investment strategies are as successful as buying dividend stocks. They have returned 9.2% annually for the 50-year period between 1973 and 2023, versus 4.3% for non-payers, according to Hartford Funds and Ned Davis Research data.
For stocks that initiate a dividend and then increase it, the performance is even better with 10.2% returns, and do so with lower volatility.
Quick-serve pizza chain Domino’s (DPZ) has been an excellent investment for the past 15 years, enjoying a stock price that has appreciated 3,230% compared to 406% returns for the S&P 500.
What many investors don’t realize is that Domino’s is also an excellent dividend stock. When the income the pizza shop returned to investors is included, its total return soars to over 4,000%.
To put that in perspective, $10,000 invested in DPZ stock in 2010 would be worth $410,740 today versus just $67,300 for the benchmark index.
The pizza chain’s fourth-quarter earnings miss last month caused its stock to stumble, and shares sit 13% below their all-time high hit last June, but that creates an opportunity for income and growth investors looking for a stock to buy and hold.
Domino’s pizza delivery empire spans over 20,000 locations across more than 90 countries. Its strengths are rooted in its operational efficiency and brand power. The company has mastered a franchise-driven model, with over 98% of its U.S. stores and a significant portion of its international outlets operated by franchisees.
This structure minimizes capital expenditure while generating steady royalty streams, bolstering its $406 million in free cash flow in 2024. Its supply chain segment, which services its stores with dough and ingredients, further enhances profitability, contributing to a 28.5% gross margin.
Technologically, Domino’s leads with innovations like its online ordering platform and delivery tracking, which helped drive 2.9% gains in total revenue in Q4 despite a softening consumer environment. Globally, its retail sales grew 4.4% in the same period, underscoring its ability to expand in diverse markets. These factors position Domino’s as a resilient player capable of weathering economic fluctuations.
Yet there are challenges for the pizza joint. Market saturation in the U.S., where it operates over 6,900 stores, limits organic growth opportunities. Partially that is by design. Domino’s has perfected the strategy called “fortressing,” which floods a market with locations to build mind share with consumers, but also promote efficiency.
Still, that pushes greater reliance on international expansion where results are mixed, particularly in Asia and Europe that have lagged to geopolitical tensions and local competition.
The fast-food sector is fiercely competitive, with rivals like Yum Brands’ (YUM) Pizza Hut and Papa John’s (PZZA) intensifying promotional wars, as seen in Domino’s modest 0.4% U.S. same-store sales growth in Q4, which fell short of expectations. Rising food and labor costs also squeeze margins.
Health trends also favor fresher, less processed options that poses a long-term risk to its pizza-centric brand, though innovations like its just-announced stuffed crust pizza show adaptability. These hurdles suggest that while Domino’s is strong, its growth trajectory isn’t without friction.
For income investors in particular, Domino’s shines brightly and will allow you to weather any period of softness.
Its dividend policy is a standout, with a 15% hike in February that brought its quarterly payout to $1.51 per share, yielding an annual $6.04 or 1.28% at current prices. This marks a decade of consistent increases, with the payout rising from $0.20 in 2014 for a 20% compound annual growth rate, or a 7,120% cumulative increase when adjusted for splits.
With its payout ratio sitting at a safe 35% of FCF, the dividend is easily supported by an earnings of $16.80 per share over the past year, ensuring its sustainability. Domino’s also uses Share repurchases to further enhance shareholder value. in 2024, the pizza chain bought back 259,000 shares for $112 million, reducing outstanding shares by 1.15% annually.
Domino’s also sports a forward P/E ratio of 24.4, which is below its five-year average. While Wall Street does have a buy rating on DPZ stock, their one-year consensus price target of $503 per share implies just 7% upside. But for long-term investors, the stock appears reasonably valued, particularly for income seekers who prioritize stability over speculative growth.
Domino’s is an excellent investment for those valuing stability and income over aggressive upside. Its strengths lie in franchise scalability, tech innovation, and strong cash flows that outweigh its challenges, including saturation and cost pressures.
For income-focused portfolios, its dividend growth and shareholder-friendly policies make it a standout, though diversification is advised to hedge sector-specific risks. Domino’s isn’t a moonshot. Rather, it is a steady slice of value in an uncertain market.
