Dividend investors would be wise to focus not just on a stock's current yield, but also on the long-term growth potential of its dividends. That's because strong businesses that consistently raise their dividend payouts reward shareholders with a steadily rising income stream that essentially equates to a raise every year. And, well, who doesn't like a raise?
But there are other reasons to value dividend growth so highly, and they're well supported by research. For instance, a study by C. Thomas Howard published in Advisor Perspectives found that for every percentage point a stock's yield rises, its annual return increases by 0.22 percentage points if it's a large cap, 0.25 if it's a mid-cap, and 0.46 if it's a small cap. Even better, Howard found that dividend-growing stocks outperformed dividend-cutters by 10 percentage points per year from 1973 to 2010 and beat both flat- and no-dividend stocks. And the icing on the cake is that Howard showed that this outperformance came with a third less volatility. Higher returns, less volatility-induced stress, and a steadily growing income stream — three powerful aspects of dividend growth investing that can help you grow your wealth.
With that in mind, here are two excellent businesses that are likely to grow their dividends substantially in the years ahead.
As the largest credit card payment networks, Visa (NYSE:V) and MasterCard (NYSE:MA) are well positioned to profit from the massive global shift toward electronic payments and away from cash transactions. These credit card titans earn a small fee from every transaction that passes through their payment networks -- a tollbooth-like business model that generates enormous cash flow and fast-growing dividend income for investors.
MasterCard and Visa enjoy powerful network effects, as each new merchant that accepts their credit cards makes their networks more valuable to consumers, and each new consumer who carries their cards increases the potential pool of customers for participating merchants, thanks to an easier means of purchase and therefore likelihood of sale. In turn, the industry is basically a duopoly, with Visa and MasterCard possessing a combined 80% share of global purchase transactions.
Yet as dominant as these payment giants are, they still have long runways for growth, since about 85% of global transactions still take place via cash or check. The trend toward digital payments is likely to continue for many years, and it should further fuel growth in revenue and profits for the leading payment networks.
Wall Street seems to agree. Analysts estimate that Visa will grow its earnings per share by more than 16% annually over the next half-decade, while MasterCard is expected to deliver annualized EPS growth of 15% during that time. Even better, with both Visa and MasterCard's payout ratios currently checking in at less than 25%, they should be able to raise their dividend payments at paces significantly above their earnings growth rates in the coming years. In fact, it's possible that both companies will more than double their dividend payments by 2022 -- and perhaps well before then.
Still, many income investors have made the mistake of overlooking Visa and MasterCard, since their dividend yields have persistently remained below 1%.
This, however, is mostly a function of these outstanding businesses' stellar stock price appreciation -- a powerful benefit that often accompanies the type of turbocharged dividend growth that MasterCard and Visa have delivered over much of the past decade.
Moreover, with both Visa and MasterCard's shares currently trading for about 23 times forward earnings estimates -- a reasonable price to pay for such high-quality and high-growth businesses -- and with their dividends set to continue their rapid ascent, investors should expect further market-beating performance in the decade to come.
All told, MasterCard and Visa provide a vital service that helps to facilitate global economic growth. And as the world continues to shift toward e-commerce, the digital payments technology these titans provide should only grow in importance in the years ahead. As such, investors may wish to consider buying shares in Visa and MasterCard today.