Dividend growth investing can be an excellent way for new investors to familiarize themselves with the stock market. Generally, growth dividend-paying stocks offer relative stability thanks to the cash generation required to fund their steadily increasing payouts to shareholders.
However, all dividends are not equal, especially when looking for long-term dividend growth. A simple test of a company's dividend sustainability is to find its payout ratio, or the percentage of net income it sends to shareholders in dividends.
Finding a ratio below 50% often shows a beautiful balance between returning cash to investors and fueling future company growth -- a sweet spot that can deliver solid returns.
Today, we will look at two publicly traded exchanges that are in this zone and would make great stocks for investors to hold forever.
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S&P Global
S&P Global (SPGI 1.49%), famed for its S&P 500 Index, has four distinct segments, of which its huge namesake index is just a portion. There's also credit ratings, market intelligence, indexes, and Platts, which is its energy and commodities market -- not to mention that S&P Global also is a behemoth in the exchanges industry.
| Metric | Ratings | Market Intelligence | Indexes | Platts |
|---|---|---|---|---|
| Operating profit (millions) | $731 | $196 | $146 | $136 |
| Operating profit change (YOY) | 5% | 11% | 15% | 8% |
Data source: S&P Global's Q2 2021 Earnings Call. YOY = year over year.
With 8% revenue growth year-over-year in the company's 2021 second quarter, S&P Global is poised for long-term outperformance. Making this growth all the more impressive is that it builds off of unprecedented levels of bond issuance in the second quarter of 2020, as corporations took advantage of low interest rates to build financial backstops during the pandemic. By providing the ratings for corporate and financial bonds alike, S&P Global quietly records the majority of its operating profit from this segment.
Turning to indexes, the company recently celebrated the 125th birthday of the Dow Jones Industrial Average, of which it has 73% ownership in a joint venture. When paired with the S&P 500, these indexes give the company two of the most prominent brands in the indexing world. Building off of this foundation in the U.S., the company is quickly beginning its international expansion and has seen global revenue grow by 10% annually during the past five years through overseas partnerships.
Sporting a market capitalization of $107 billion, S&P Global will probably not be the next S&P 500 stock to double in price. However, this Dividend Aristocrat has increased its payout for 48 consecutive years, yields just 0.7%, and has a payout ratio of only 28%. While this dividend may look small, it is worth noting that its five-year yield on cost is already 2.4% thanks to consistent annual increases. Yield on cost is a great way to see the benefits of dividend growth investing: In this case, it shows you what today's dividend yield equates to compared to cost of the shares five years ago.
Having produced triple the returns of its own S&P 500 Index during the past 10 years, it is reasonable to be optimistic when looking out another decade for the stock.
Nasdaq
Hidden behind the company's namesake index, Nasdaq Inc. (NDAQ 0.37%) is a diversified, technology-focused giant in the middle of a transformation. Nasdaq's shift to software-as-a-service is leading this evolution, growing from 21% of sales in 2016 to 34% as of this year's second quarter. Management expects this share to rise to between 40% and 50% of sales by 2025, as it expands into the market technology and investment intelligence side of its business.
The company's financial crime-prevention unit had 88% year-over-year revenue growth during the quarter, much of it tied to the $2.75 billion acquisition of Verafin last year. Nasdaq aims to combat money laundering and bank fraud while offering risk solutions for insurance. Despite being in its infancy, management believes the market for this unit's services amounts to roughly $10 billion annually, more than 20 times the size of the segment's revenue during the past 12 months.
When pairing this business with its existing corporate platform's offerings, it is clear that Nasdaq has become a one-stop shop for any company considering an exchange listing. Chief Executive Officer Adena Friedman expanded on this point during the company's Q2 earnings call:
In our Listings business, Nasdaq again led US exchanges for IPOs during the period, welcoming 135 IPOs that raised $31.7 billion, including 88 operating company IPOs and 47 SPAC IPOs. The Nasdaq Stock Market led US exchanges with a 78% total win rate on IPOs, as well as executing the largest direct listing ever, Coinbase. In addition to new listings, we also welcomed 10 switches from the second -- in the second quarter 2021, representing a combined $183 billion in market value, including Honeywell, a Dow 30 company. The total market value of all companies transferring to Nasdaq since 2016 now exceeds $1 trillion.
With a market capitalization of $34 billion, Nasdaq appears small, especially compared to S&P Global and its $107 billion market cap. That also means there may be more room for growth. Throw in the company's nine consecutive years of increases to its 1% dividend yield, and it could easily outpace its own index.
