2 Dividend Growth Stocks of the Future

Here's why Visa and MasterCard are set to grow their dividends for decades.

Jan 29, 2014 at 12:39PM

There are few investments hotter than dividend growth stocks. Following the 2008 financial crisis, many investors saw the risks inherent in stocks built solely for capital appreciation. Why not look for capital appreciation and cash dividends at the same time?

The logic follows that a portfolio that spins off cash dividends can provide current income, regardless of where stock prices go. And thanks to dividends, investors won't have to sell shares at less-than-opportune times (say, 2009) to raise cash for immediate needs.

The dividend growth stocks of the future
A list of dividend aristocrats (dividend stocks that have increased dividends for 25 years or more) gives you a look at history's best dividend stocks. You'll find conventional widow-and-orphan stocks in this list -- Coca-Cola, Procter & Gamble, and Johnson & Johnson.

What about the dividend stocks of the future? If I had to make a wager, I'd place my bet on Visa (NYSE:V) and MasterCard (NYSE:MA) becoming full-blown dividend growth names in the decades to follow.

Here are three reasons.

1. They're cash cows
Payment processing is a truly remarkable business. It's effectively a duopoly market, with Visa and MasterCard playing part in nearly 90% of all transactions. Discover and American Express merely pick up the scraps. Thus, Visa and MasterCard have ample pricing power, which can be found in their impressive margins.

Net margins at Visa have hovered around 40%; MasterCard's have been in the mid to high 30% range. In both cases, free cash flow has closely mirrored net income over time, so this isn't a case of earnings on accrual. Instead, Visa and MasterCard's earnings are coming in the form of cash -- cash that can be paid out as a dividend.

2. Valuation
Neither Visa nor MasterCard are cheap, trading at more than 20 times 2015 earnings estimates, and nearly 30 times earnings in 2013. Both, however, are consistently repurchasing shares. Visa is the most aggressive buyer of its own stock, spending some $5.3 billion on share repurchases in its 2013 fiscal year. MasterCard's repurchases are much smaller, coming in at $2.3 billion in the last 12 months.

Since a majority of Visa and MasterCard shares are held by institutional investors -- many of which are buy-and-hold investors -- their ability to repurchase shares may be limited in the future. With much of the float controlled by institutional investors, and both being fairly valued, a dividend may make more sense than growing, ongoing repurchases.

3. Future growth
There are only two limits to a growing dividend: the payout ratio (percentage of income paid out as a dividend) and growth in net income. Future growth is much more important given their low payout ratios and growth-stock valuations.

Of course, it is growth that makes the payment processors attractive. MasterCard suspects that 85% of global payment volume is done in cash. Over time, the mix should shift to digital forms of payment, preferably cards with a Visa or MasterCard label. This will only fuel growth as more and more transactions are done over payment networks, with the payment processors collecting fees on every swipe.

In the last five years, Visa has averaged annual revenue growth of roughly 13.5%, compared to 12.7% growth for MasterCard. During this same period, global economic growth topped at 5.3% in 2010, and bottomed at -0.5% in 2009. Clearly, Visa and MasterCard are very capable of growing faster than the global economy thanks to a shift from cash to card.

The Foolish bottom line
We're in the first innings of the payment processing boom, and Visa and MasterCard are natural beneficiaries. Luckily for investors, Visa nor MasterCard require significant new investments to grow, generate billions in annual cash, and pay out only a fraction of their income as a dividend.

MasterCard's recent announcement of a bigger dividend marks three years of consistent dividend increases. Visa is now on track for six straight years of dividend increases. This is behavior consistent with companies wanting the coveted dividend growth stock crown, and the reason I believe Visa and MasterCard should be on any dividend stock investor's radar.

Nine dividend stocks to buy and hold forever
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons for this are too numerous to list here, but you can rest assured it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. It recommends and owns shares of Coca-Cola, Johnson & Johnson, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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