How an entire lifetime shapes up can really come down to just a few key big decisions.

Where one lives, who one marries, what kind of career one chooses to pursue are a few examples.

I’d also say that how one decides to manage their money is another.

There are a lot of ways you can go with money, ranging from being a spendthrift to a miser on the spending side.

And then there’s the question of what do with savings – if any are to be had.

When it comes to this, I decided long ago that I’d take dedicated my savings to the dividend growth investing strategy.

This is a long-term investment strategy involving the buying and holding of shares in high-quality companies rewarding shareholders with reliable, rising cash dividends.

You’ll find hundreds of such companies over at the Dividend Champions, Contenders, and Challengers list.

This list has invaluable information on US-listed stocks that have raised dividends each year for at least the last five consecutive years.

It typically requires a certain amount of greatness out of a business to be able to generate the ever-larger profit necessary to sustain ever-higher cash dividend payments, and great businesses typically make for excellent long-term investments.

This helps to explain why I’ve been such an ardent fan of the strategy.

I saw it as the best path toward achieving financial independence.

Indeed, I was able to achieve that earlier than I ever thought I would, even being able to retire in my early 30s.

My Early Retirement Blueprint details how I did it, and it shares how almost anyone out there can do the same.

I now control the FIRE Fund.

That’s my real-money portfolio, and it generates enough five-figure passive dividend income for me to comfortably live off of.

Now, dividend growth investing isn’t only about investing in great businesses; it’s also about investing at great valuations.

See, price only tells you what you pay, but value tells you what you get.

An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.

This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.

Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.

That higher yield correlates to greater long-term total return potential.

This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.

And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.

These dynamics should reduce risk.

Undervaluation introduces a margin of safety.

This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.

It’s protection against the possible downside.

How you manage your money will have a major impact on the outcome of your entire life, and I believe (based on my own lived experience) using savings to consistently buy undervalued high-quality dividend growth stocks is a fantastic way to get to a favorable outcome (which could include achieving financial independence).

If the whole valuation concept seems too tricky, be sure to read Lesson 11: Valuation.

Written by fellow contributor Dave Van Knapp as part of a series of “lessons” designed to teach the dividend growth investing strategy, it uses plain language to explain what valuation is and how it works.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

Yum China Holdings, Inc. (YUMC)

Yum China Holdings, Inc. (YUMC), an American-Chinese company, is the largest restaurant operator in China.

Founded in 2016 after being spun out of former parent company Yum! Brands, Inc. (YUM), but with certain roots dating back to the 1930s, Yum China is now a $17 billion (by market cap) restaurant leader employing more than 200,000 people.

Yum China operates approximately 18,000 restaurants across mainland China.

Its primary brands are KFC, Pizza Hut, and Taco Bell, of which Yum China has exclusive rights to operate and sub-license in China (paying a 3% systemwide sales royalty back to its former parent company).

In addition, Yum China has outright ownership of a few smaller local brands based on Chinese dining and coffee.

KFC, in particular, is central to Yum China.

It’s the flagship brand.

KFC is the largest QSR brand in China in terms of system sales, and KFC has grown to over 13,000 locations across 2,600 Chinese cities.

Whereas KFC may have lost a lot of shine in the US, it’s extremely popular and growing rapidly in China.

And this is a key part of the investment thesis, as China has a far lower-than-global-average spend on chain restaurants, but this is rapidly changing as chains proliferate, inflation makes it difficult for local operators, and the fragmented market consolidates.

Changing dynamics disproportionately work to Yum China’s favor, helping to explain its industry-defying growth profile showing steady and rapid revenue, profit, and dividend growth.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Yum China has increased its dividend for four consecutive years.

I usually limit write-ups to those businesses with at least five consecutive years of dividend increases, but I think Yum China is interesting enough at this time to feature a little bit early.

A temporary dividend cut during the pandemic (something I’ve looked the other way on, considering the unusual nature of the event) is the only reason why Yum China doesn’t already have nearly a decade of dividend growth done and dusted.

Its dividend growth rate since 2022 is 26%.

That’s outstanding, but it’s obviously been largely fueled by a rapid normalization after the pandemic-related cut.

Still, even the most recent dividend increase, which was announced back in February, came in at 20.8%.

Yum China is still aggressively raising the dividend.

On top of that, the stock yields 2.4%.

That’s a rather high starting yield when the underlying dividend growth is well into double-digit territory.

This yield is 130 basis points higher than its own five-year average, but this is inaccurately and unfairly skewed by the pandemic.

The payout ratio is 46.2%, which is still very healthy, but future dividend growth will likely slow and settle into a level that more closely tracks business growth.

It’s a surprisingly appealing dividend profile, and I’d note that Yum China does declare its dividend in USD (negating any currency exchange rate headaches on the dividend).

Revenue and Earnings Growth

As appealing as it may be, though, much of that is coming from past data.

However, investors must always be thinking about the possible data of the future, as the capital of today gets risked for the rewards of tomorrow.

That’s why I’ll now build out a forward-looking growth trajectory for the business, which will be instrumental for the valuation process.

I’ll first show you what the business has done over the last nine years in terms of its top-line and bottom-line growth.

I’ll then reveal a professional prognostication for near-term profit growth.

Blending the proven past with a future forecast in this way should give us the ability to roughly gauge where the business could be going from here.

While I usually use a decade’s worth of top-line and bottom-line growth, I’ll only use nine years in this case because Yum China was spun out in late 2016.

Yum China increased its revenue from $7.2 billion in FY 2017 to $11.8 billion in FY 2025.

That’s a compound annual growth rate of 6.4%.

Meanwhile, earnings per share grew from $1.01 to $2.51 over this period, which is a CAGR of 12.1%.

This is impressive stuff out of a large QSR chain.

A combination of buybacks and margin expansion combined to drive excess bottom-line growth.

Looking forward, CFRA is calling for Yum China to compound its EPS at an annual rate of 8% over the next three years.

CFRA cites expansion into smaller cities, expanding delivery capabilities, and the capital-light franchise model as growth levers for Yum China.

While I think 8% is a reasonable base case to work with, I’d note that Yum China printed 13% YOY EPS growth in its FY 2026 Q1 report – an acceleration off of what it’s done since going independent.

When you pit that proven business growth against the near-term forecast, it seems very logical to assume that Yum China is going to do at least high-single-digit EPS growth over the foreseeable future.

With the payout ratio being as low as it is, that sets the dividend up for something along the lines of low-teens growth.

With a starting yield of over 2%, we’re talking about the possibility of a mid-teens type of annualized total return profile here – before accounting for any kind of multiple expansion.

When that’s coming from a stable, easy-to-understand QSR business, that’s hard to pass up.

Financial Position

Moving over to the balance sheet, Yum China has a stellar financial position.

The company carries essentially no long-term debt at all.

Its net cash is well over $1 billion, approaching 8% of the market cap.

This contrasts sharply with its former mothership, which carries quite a bit of long-term debt (part of a general theme I’ve noticed with Asian companies relative to American ones).

Profitability is good.

Return on equity has averaged 13.2% over the last five years, while net margin has averaged 8.2%.

For the QSR space, these are very respectable numbers, especially when weighed against the lack of leverage.

Overall, Yum China strikes me as one of the most exciting players in the entire QSR space right now due to idiosyncratic opportunities across its brands and geography.

And with economies of scale, brand recognition, an established supply chain, an ironclad franchise framework, and pricing power with both consumers and vendors, the company does benefit from durable competitive advantages.

Of course, there are risks to consider.

Litigation, regulation, and competition are omnipresent risks in every industry.

Competition is a particular issue in the QSR space, but Yum China’s scale and brand power are formidable.

Trends change, even in food, and Yum China will need to adapt and evolve to consumer trends.

On that point, any rise in interest in more healthy eating would likely be a headwind for Yum China.

Its brands are powerful, but their Western roots could turn into a liability amid ongoing geopolitical tension between China and the US.

Food supply is intermittently prone to shortages from widespread animal diseases, which can temporarily weigh on the company.

Core brands are focused on China, somewhat limiting the TAM.

A major economic slowdown in China could lead to spending pullbacks that impact Yum China.

I find the risks here to be mostly standard for a large QSR operator.

But the valuation is not up to standard, despite the growth and quality being well above standards…

Valuation

The stock is trading hands for a P/E ratio of 18.7.

That’s well below where almost all large QSRs are at right now, and it’s definitely well below where the former parent company is at (even though Yum China outperforms in many categories).

Putting aside the industry comparisons, this is even far lower than the stock’s own five-year average P/E ratio of 23.2.

So it appears to be cheap relative to lesser competitors and itself.

Its P/CF ratio of 8.9, which is low in absolute terms, is also well off of its own five-year average of 11.1, giving us further evidence of a disconnect.

And the yield, as noted earlier, is significantly higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a discount model analysis.

I factored in a 10% discount rate and a long-term dividend growth rate of 8%.

With proven double-digit business and dividend growth, even up through the most recent quarter, I’m not putting a very high hurdle out in front here.

Moreover, the forecast for near-term EPS growth is right at this mark, and the payout ratio has room for expansion.

I see a very long runway for high-single-digit dividend growth ahead for Yum China.

In my view, this business is too durable, too strong, and reliably growing too quickly to materially disappoint when the expectation is set at this level.

I’d expect a natural slowdown for what is a large, established company, but the most recent dividend raise was over 20%, so there’s a large gap between that and 8%.

The DDM analysis gives me a fair value of $62.64.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

This looks like low-hanging fruit to me, especially if one has any interest in China (or, at the very least, isn’t negative on China).

But we’ll now compare that valuation with where two professional stock analysis firms have come out at.

This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates YUMC as a 5-star stock, with a fair value estimate of $76.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates YUMC as a 3-star “HOLD”, with a 12-month target price of $52.00.

I landed in the middle, which is where I often am when there’s a spread. Averaging the three numbers out gives us a final valuation of $63.55, which would indicate the stock is possibly 23% undervalued.

Bottom line: Yum China Holdings, Inc. (YUMC) is a high-quality operator in the QSR space, with some of the strongest and most reliable brands in all of China. Plus, with net cash on the balance sheet, it retains lots of optionality as it navigates changing trends. With a market-beating yield, double-digit dividend growth, a low payout ratio, nearly five consecutive years of dividend increases, and the potential that shares are 23% undervalued, this might be the best way for long-term dividend growth investors to play China.

-Jason Fieber

Note from D&I: How safe is YUMC‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 60. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, YUMC’s dividend appears Borderline Safe with a moderate risk of being cut. Learn more about Dividend Safety Scores here.

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Disclosure: I have no position in YUMC.