The restaurant space has been a tough one to own.
The Dow Jones U.S. Restaurants & Bars Index has grossly underperformed the Dow Jones Industrial Average over the last twelve months.
But that means this part of the industry is offering really compelling investments.
The other fantastic thing about these seemingly underperforming restaurant stocks is that the dividend yields are now well above what the rest of the market has to offer.
The restaurant industry as a whole has an average dividend yield of 2.7%. Compare that to the average dividend yield of the S&P 500 at 1.8%.
The three stocks below, incidentally, offer the top dividend yields in the industry.
Here are the 3 dividend stocks investors should be snacking on:
No. 1: Darden Restaurants (NYSE: DRI)
Darden runs some 1,500 restaurants, which includes Olive Garden, LongHorn Steakhouse, Bahama Breeze, Yard House brands and a few others. Darden Restaurants has been under a lot of scrutiny of late, given its underperforming brands.
But Golden Gate Capital is buying the Red Lobster brand, which is a step in the right direction. However, activist investor Starboard Value is pushing Darden to unlock even more value. Starboard owns 6.2% of the Darden and wants the company to spin off its real estate and specialty restaurants segment in an effort to focus on the Olive Garden turnaround.
Part of Darden’s own turnaround plan includes revamping its core menu, simplifying its kitchen and developing a new restaurant design. The other great news is that as this turnaround takes place, you’ll be getting a 4.6% dividend yield, which is a 59% payout of earnings.
No. 2: Cracker Barrel Old Country Store (NASDAQ: CBRL)
Cracker Barrel runs just over 600 down-home restaurants across 40 states, with a focus on the Southeast and Midwest. Its $2.4 billion market cap doesn’t make it right for every investor. But its dividend yield of 3.9% —a payout of 75% of its earnings— makes it worth a closer look.
Shares of Cracker Barrel are down 14% over the last year; harsh winter weather put a real damper on sales. However, the rebounding economy and the company’s own internal initiatives should help boost sales in the near term. Some of these key strategies include $5.99 lunches and opening smaller restaurants.
Biglari Holdings, which owns 20% of Cracker Barrel, has been pushing for change at the company since 2011. Biglari wants Cracker Barrel to open new stores and also take on more debt. Most notably, the company could lever up its balance sheet while rates are low, taking advantage of its billion-dollar real estate portfolio.
No. 3: Einstein Noah Restaurant Group (NASDAQ: BAGL)
Einstein runs some 775 bagel restaurants. With a $250 million market cap, Einstein is very much a small-cap growth story. The company generates strong free cash flow, which it is putting to work on remodeling stores. It also trades at the lowest forward P/E ratio (price-to-earnings ratio of next year’s earnings estimates) of the three stocks, coming in at 13.6.
Billionaire David Einhorn is also a big advocate of Einstein — owning 37% of the restaurant company. Einhorn takes huge stakes in businesses and has managed a 20% annualized return since starting his Greenlight Capital hedge fund back in 1996.
Factoring in Wall Street’s earnings growth expectations, Einstein trades at a P/E-to-expected growth rate (PEG) ratio of just 1. Anything at or below 1 is considered a growth-at-a-reasonable-price opportunity. Meanwhile, its 3.7% dividend yield (a 67% payout of earnings) makes it an income story.
The restaurant space can be fickle. Taste preferences change frequently, requiring companies to reinvent themselves. The three stocks above are doing just that. And it also pays to have a dividend — notably one of the highest yields in the space.
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