McDonald’s Stock Vs Index Fund: Which Is Best?

Very few brands can boast true global awareness – the sort of name recognition that cuts across cultural and geographic boundaries on every continent. Disney is one, thanks to the iconic Mickey Mouse, and Coca-Cola is another. 

McDonald’s has its own place on that list, with more than 39,000 restaurants worldwide. There is a UFO-shaped McDonald’s in Roswell, New Mexico, and a McDonald’s located next to Prague’s Museum of Communism. There’s one across from Egypt’s Luxor Temple and another inside of Paris’ famed Louvre Museum. 

If you are traveling through Israel’s Negev Desert, you can stop for a burger and fries, and you have the option of using the ski-through window at the McDonald’s in Lindvallen, Sweden.There’s even a restaurant located on the Guantanamo Bay naval base. In other words, no matter where you go, you’ll find the Golden Arches nearby. 

It’s true that one franchise – Subway – has more locations than McDonald’s, but from the perspective of geographic diversity and total sales, McDonald’s is number one. That makes the shares tempting for investors – but is McDonald’s stock a buy? 

Some analysts suggest that while McDonald’s promises stable profits long-term, there are alternatives that offer more advantages – for example, S&P 500 index funds. So, perhaps the real question is, in a head-to-head matchup between McDonald’s stock vs. index funds: which is best? 

Fast Food Market Size Is Massive $1 Trillion

When taken as a whole, the fast food industry is massive. Total global sales are well over $1 trillion, barring extraordinary events like the 2020 pandemic.

Analysts are consistently positive about the market leaders because they rake in profits year after year. Better still, there are always new opportunities that offer rapid growth as they catch consumer attention through unique menus and flawless marketing strategies. 

Generally speaking, fast food investing is a smart move because the industry is in an economic sweet spot. The quick service and low prices mean these restaurants don’t lose business during a market downturn. Then, when the economy is thriving, sales and profits go straight up. 

McDonald’s Top Line Sales Up 35%

McDonald’s financials are almost entirely positive from an investor perspective. Pandemic or no pandemic, McDonald’s demonstrated its ability to weather economic storms and continue its growth. 

In its first-quarter earnings call, business leaders announced that comparable sales increased by 7.5 percent year-over-year. More importantly, the figures exceeded 2019’s results. Furthermore, total revenues increased by 9 percent year-over-year, and operating income went up by 35 percent. That left investors and analysts confident that they can look forward to continued strong returns. 

McDonald’s Contactless Delivery A Win

As with any business, the only way McDonald’s can sustain its growth is by adapting to changing consumer expectations. In 2020, when dining rooms were closed in many US and international locations, the company quickly ramped up its investment in technology to make up lost sales through drive-thru and contactless delivery. 

Now drive-thru, delivery, and new digital tools are core elements of McDonald’s growth strategy. The company is focusing resources on improving these channels to meet consumer demand. McDonald’s guests have become accustomed to the convenience of drive-thru, delivery, and digital ordering, and it appears unlikely their interest in dining rooms will return to previous levels. 

The company plans 500 new locations for 2021, which demonstrates that McDonald’s is confident in its ability to maintain its market leadership position. 

Has McDonald’s Saturated Its Market?

There seems little chance of McDonald’s losing a significant amount of market share – it’s one of those companies that is just too big to fail. However, there are certain risks that investors must consider before buying into the relatively expensive fast food giant. 

First, consumers are gradually moving towards healthier food choices. While McDonald’s occasionally makes an effort to introduce calorie- and fat-conscious options, those menu items rarely catch on. 

Meanwhile, because of McDonald’s size and reach, it is the go-to example of problematic businesses when the public conversation turns to issues like obesity and nutrition. In fact, McDonald’s was the subject of a damaging documentary, Supersize Me, that explored the harm too much fast food can do to health in a short period. That’s not the sort of brand recognition that boosts McDonald’s share prices. 

Second, there is a concern that McDonald’s has saturated the market. There simply aren’t that many more street corners to install new restaurants. When combined with the increasing expense of owning a McDonald’s franchise, it is reasonable to believe that the company can’t continue growing forever. 

Those points have some investors looking elsewhere for a place to put their cash. In such cases, an index fund like the S&P 500 is an attractive alternative. 

Index Funds Feature The Best Of The Best

The beauty of investing in the S&P 500 is that it offers instant diversification. In a single share of an S&P 500 index fund, you get 500 of the strongest companies in the United States. The ten largest S&P 500 members include Apple, Microsoft, Amazon, Facebook (FB), Alphabet (Google), Tesla, Berkshire Hathaway, JP Morgan Chase, and Johnson & Johnson. 

While the market always has its ups and downs, the S&P’s record speaks for itself. Historically, it has always recovered from its lows and gone on to reach new heights. The most successful investors in the world, including Warren Buffett, regularly encourage the purchase of S&P index funds. That’s because the S&P offers steady, stable returns long-term. 

Pros and Cons of McDonald’s Vs Index Fund

It’s worth noting that McDonald’s stock is included in the S&P 500, so any purchase of S&P 500 funds automatically exposes investors to McDonald’s growth. However, over time, McDonald’s has proven to be a far more lucrative investment than the S&P 500. 

McDonald’s held its Initial Public Offering (IPO) in April 1965. Investors who purchased 100 shares at the price of $22.50 would own more than 74,000 shares today because the stock has split 12 times since its IPO. Those shares would be valued at more than $12 million, and they would generate dividends of roughly $345,000 per year.

The S&P 500 has seen its value grow as well, but the incline hasn’t been as steep. Over the past 50 years, the S&P 500 has increased by approximately 3,880 percent. McDonald’s has returned closer to 33,000 percent. 

McDonald’s Stock Vs Index Fund: The Bottom Line 

McDonald’s shares have returned, on average, 16.9 percent per year as compared to the S&P’s 11.1 percent average annual return. Both of these figures include dividends. That difference becomes more apparent if you consider how compounding impacts your investment. Though the S&P 500 might feel less risky, it’s not clear that the benefits of lower risk outweigh opportunity costs. In short, when it comes to McDonald’s vs. index funds like the S&P 500, McDonald’s is a better buy historically. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.