MCD is undervalued with >26% upside in 12-18 months; AI innovation supports long-term thesis despite near-term FCF decline and health trend risks.

Let's start directly with McDonald's as the first dividend-paying stock I will highlight. McDonald's is undoubtedly the most optimistic dividend stock for me. The main reason for my optimism about McDonald's is innovation.

I believe this company will benefit from significant progress in innovation over the next three, five, and ten years. The primary driver of this innovation will be artificial intelligence.

Starting from the drive-through service window . I believe McDonald's could integrate more artificial intelligence into the service window, improving the customer experience and reducing labor costs at each location.

In addition, I think McDonald's could benefit from food delivery robots, which could reduce customer service costs and expand the geographic reach of each location.

These are the main positive aspects of McDonald's that I am excited about. But of course, there are risks to consider , and one of the biggest risks that concerns me about McDonald's is the trend of consumers towards healthier options, and McDonald's lack of healthy options available .

Over time, I believe McDonald's can shift towards providing more healthy options, and offering these options in the McDonald's way – at a lower cost than its competitors, and in a more consistent manner across its locations.

Therefore, I believe the risk-reward equation is attractive for McDonald's. By the way, I calculated the fair value of a McDonald's stock at $299. For McDonald's, I expect a year of decline in 2026 with its free cash flow falling to $7.25 billion, down from $8.5 billion last year .

I expect McDonald's to return to growth in 2027, with its free cash flow rising to $8.5 billion, reaching $11.8 billion by 2031.

So, I don't expect very large growth for McDonald's over the next five years, or over the next decade, twenty, thirty, or forty years. I expect relatively slow growth in McDonald's free cash flow, perhaps a single-digit or high- single-digit percentage, over the next decade or so.

This growth then slows down to a free cash flow growth rate of about 3% from 2035 onwards. Again, not exciting growth, but even with those low expectations, the stock appears undervalued at $237 compared to my fair value estimate of $299.

I estimate that there is a possibility for McDonald's stock to rise by more than 26% during the next 12 to 18 months.

High-income consumers are doing very well because asset prices are rising, and they are seeing an increase in their overall wealth due to rising stock, home, and asset prices. Artificial intelligence contributes to accelerating the pace of asset valuations for that upper class.

On the other hand, low-income earners—or rather, I should say the lower class, low-income earners—have less disposable income because their living costs are increasing at a faster rate than their wages are growing.

Therefore, they are making difficult choices that affect these four companies I mentioned, because they are consumer-oriented companies and are facing headwinds as consumers move towards cheaper options .

Consumers are choosing to reduce their consumption of these products, and therefore these headwinds are affecting all four companies.

Of course, if you are an investor looking for dividends, you are looking for a good return, and these four companies offer attractive returns, with General Mills leading the way at 7.2%, followed by PepsiCo at 4.5% , Procter & Gamble at 3%, and McDonald's at more than 3 %.

Furthermore, I think it is reasonable to assume that these companies will continue to increase their dividend payouts for many years to come. Thus, not only will you receive a certain amount of dividend income this year, but it is likely to be even greater next year, and even greater the year after that, and so on for many years to come.

Therefore, I believe these are four undervalued dividend stocks that investors can buy now and hold perhaps forever or for decades without having to sell them, and simply benefit from the dividend income .