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Buy This Stock Before It Becomes a Dividend Aristocrat

By Dave Kovaleski - Feb 26, 2021 at 7:15AM

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This credit card giant has had 12 straight years of dividend increases, along with great returns.

Dividend Aristocrat is the name given to the elite S&P 500 companies that have increased their annual stock's dividend for 25 straight years or more. This exalted status speaks to a company's longevity, stability, and earnings consistency. If it can raise its dividend through various markets and economic cycles -- like a recession and a pandemic -- that speaks to the company's long-term success.

Credit card processor Visa (V 4.51%) is on its way to becoming a Dividend Aristocrat, with 12 straight years of dividend increases. But Visa has so much more going for it than just its rising dividend. That's why this fintech company's stock is a good all-around buy.

Visa's rising dividend: 12 years and counting

Visa, the world's largest credit card processor, has been an earnings machine, with about 20% annual earnings increases over the last decade. As a result, the stock price has gone up about 28% per year over the last 10 years through the end of 2020.

A couple looking at a laptop, happy about a purchase.

Image source: Getty Images.

Last year, the stock price returned 17%, but it was a difficult year as revenue and net income were down by 6% and 4%, respectively, in the first quarter of fiscal 2021 (which ended Dec. 31). Payment volume and the number of processed transactions in the quarter both increased year over year, which are good signs. The revenue and earnings declines came from a sharp drop in cross-border volume, which was down 21%. This was due to a rise in COVID-19 cases in some international destinations and limits on cross-border travel.

Visa currently pays out a $0.32 per share quarterly dividend at a yield of 0.63%, which translates to a $1.28 payout per share annually. The percentage of earnings that go to the dividend -- the payout ratio -- is 23%. It's a solid number that indicates Visa is not paying out too much of its earnings to the dividend. The dividend has grown about 19% over the past five years.

The yield is lower than the average dividend yield on the S&P 500, which is about 1.5%. But while a consistent dividend is a great feature, it is important to evaluate the long-term capital appreciation of the stock as well.

Visa's growth potential

Visa has been a great stock performer over the past decade, and even last year when spending was down due to the pandemic, it still had a solid performance. As the pandemic fades with the rollout of vaccines throughout 2021, worldwide spending is expected to increase and Visa's revenue should increase as well.

The credit card company maintains a 50% profit margin and a ridiculously high 65% operating margin, which is how much it makes on every dollar of revenue. It has tons of cash with $18.2 billion in cash and cash equivalents, up from $12.2 billion a year ago. 

This puts Visa in a great position to invest in technologies, services, partnerships, and acquisitions that will allow it to maintain its leadership position. Over the next decade and beyond, the world will gradually move away from cash, which will put Visa at the forefront of this cashless trend. It has made investments in tap-to-pay cards as well as digital payments through Visa Direct. In fiscal 2021's first quarter, Visa saw a 60% increase in transactions through its Visa Direct electronic payment service.

Visa should see continued double-digit percentage earnings growth over the next decade, and that will not only lead to great returns but an increasing dividend that will likely see this stock join the list of Dividend Aristocrats.

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Stocks Mentioned

Visa Inc. Stock Quote
Visa Inc.
V
$205.51 (4.51%) $8.87

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