5 Top Restaurant Stocks for Dividend Income

Restaurant stocks are a little risky, since they're subject to food scares, seasons and recessions, but they're fun, especially if they have dividends.

Yet some analysts are predicting a bear market will impact restaurant stocks in the near future, since consumers cut their discretionary dining budgets when times are tight. The sector is on the front lines when the bear market appears.

But others say the public might head toward affordable food, so restaurants with lower priced menus might do well. And, with consumer confidence in July at one of the highest points since the recovery, at 97, and unemployment claims so low, these may be signals of a healthy economy.

[See: 8 Stocks to Profit From America's Love of Burgers.]

Making income through dividend investing involves searching for solid companies that have a good chance of increasing the dividend year after year. As the company's sales and profits grow, dividends usually grow also, and the money you make can be reinvested or used as cash.

Daniel L. Grote of Latitude Financial Group, who has been in the financial planning industry for more than 14 years, says with interest rates offering a pittance over the last few years, he is seeing that "investors, especially retirees are starving for yield."

"The saying, 'desperate times lead to desperate measures' may be true, but we are actively seeking income alternatives for our retired clients," Grote says.

He studied five stocks that pay stronger-than-average dividends and are among the leaders in the restaurant business.

Dine Equity (ticker: DIN). Who doesn't like fluffy pancakes and affordable seafood? Dine Equity, known for International House of Pancakes and Applebee's, is bringing an excellent dividend return of 4.85 percent with a low P/E of 13.9 percent compared to 26.5 percent for the industry, Grote says. (P/E helps investors know where the company stands in the market by dividing a share's latest price by per-share earnings.

Dunkin' Brands Group (DNKN). If you're seeking an ever increasing dividend, Dunkin' Brands Group has an impressive dividend track record. This year expected to be at $1.2 per share, up from $1.06 last year and 60 cents per share in 2012. The company is adding franchises and is trading at higher P/E multiples, the dividend yield of 2.39 percent is better than the industry average of 1.84 percent, Grote says.

Yum Brands (YUM). Another better than average restaurant group with higher than industry average dividends is Yum Brands. Known for KFC, Taco Bell and Pizza Hut, this stock pays 2.05 percent dividend yield with a P/E ratio of 27.1 percent. This stock is one to add to the growth component of your portfolio that can offer some income support, Grote says.

[See: 6 Reliable Dividend Stocks Paying Out for 100 or More.]

Brinker International (EAT). Known for Chili's, The Macaroni Grill and On the Border restaurants, Brinker International also has a solid track record of increasing their dividend and offers a dividend yield of 2.36 percent, Grote says.

Darden Restaurants (DRI). Known for family favorites such as Olive Garden and Longhorn Steakhouse and fine dining favorite The Capital Grill, Darden Restaurants boasts a dividend yield of 3.6 percent and a strong history for raising their dividend. The P/E ratio is below the industry at 22.6 percent, Grote says.

Mathew Dahlberg, founder of Main Street Investments in Kansas City, Missouri, says he has been a fan of Darden for a long time since its management has a solid track record of delivering value for shareholders through careful cost control and by delivering a consistent, quality dining experience.

"Moreover, the stock's chunky dividend of $2.24 per year could help mitigate any difficult times the industry as a whole may face," he says. "Other positives for the company are that they have significantly cut their debt in recent years, and the company has diversified into upper-class dining with their purchase of The Capital Grille. Obviously these customers are more insulated from economic slowdowns."

But both Dahlberg and the fintech software firm, fractal, warn that restaurant stocks might be headed for a dip.

"I believe that the industry as a whole looks overvalued and is exposed to a potential recession, especially as restaurants are one of the first budgetary items that consumers look to trim when facing declining discretionary spending," Dahlberg says.

If you're short selling stocks, fractal is much less optimistic about DIN and other dining stocks. Using data analytics software to ponder the stocks DIN, Bob Evans Farms (BOBE), Cheesecake Factory (CAKE), Cracker Barrel Old Country Store (CBRL), DRI and McDonald's Corp. (MCD), Managing Director Rich Clifford agreed there were signs of a future decline.

[Read: Where Investors Can Look for Yield.]

"Medium term, all six of the data sets we observed showed there is significant risk of a bear market pattern forming," Clifford says.

Top Restaurants

Stock information correct as of Aug. 29, 2016, 9:45 a.m.

Or see the U.S. News list of Restaurants »

Christine Giordano is a freelance business journalist with a passion to help consumers make educated decisions. Also a columnist for Newsday, you can follow her on Twitter @chrisgiordano.