Predictability and the stock market are two things that rarely go hand in hand. While there are no risk-free options in stocks, companies with stable operations and a history of increasing dividends can provide a dose of predictability to investors.
Specifically, S&P 500 stocks with healthy dividends have outperformed the index, posting 10% annualized returns versus 8% for the index as a whole since 1973. By healthy, I mean two things: a dividend that is comfortably funded by a company's net income and a history of raising this dividend annually.
Today, we will look at three S&P 500 stocks that perfectly fit this healthy dividend profile and look like they will continue outperforming their peers in the broader index.
Image source: Getty Images.
Maximum dividend potential
| Metric | Nasdaq | Visa | Domino's Pizza |
|---|---|---|---|
| Dividend yield | 1% | 0.7% | 0.7% |
| Payout ratio | 30% | 23% | 27% |
| Maximum dividend potential | 3.4% | 3.2% | 2.7% |
Data source: Yahoo! Finance.
By dividing a stock's dividend yield by its payout ratio, maximum dividend potential shows what a company would yield if it paid out all available income to shareholders. This quick calculation is useful for companies like the three we will look at today, as it helps highlight the potential of their small but growing dividend yields -- all at today's current share prices.
Nasdaq: 3.4% maximum dividend potential
Led by its budding software-as-a-service (SaaS) operations, diversified financial exchange Nasdaq (NDAQ 0.47%) grew its annualized recurring revenue (ARR) by 19% for the third quarter year over year. Posting 42% companywide SaaS sales growth year over year for Q3, these sticky sales have grown to 34% of Nasdaq's total ARR.
Driving this SaaS growth is the company's promising anti-financial crime unit which grew 16% organically year over year for Q3 and 106% year over year if its recent acquisition of Verafin is included. This acquisition focuses upon the market technology and fraud and anti-money laundering sector, which has an estimated serviceable addressable market of $9.5 billion.
Compared to Nasdaq's trailing-12-month revenue of $437 million for this segment, this market opportunity is 20 times larger than its current operations.
Image Source: Y-Charts.
NDAQ Profit Margin data by YCharts
Thanks to the company's ongoing SaaS transformation, Nasdaq has seen its profit margin nearly double in just the last three years, highlighting the higher margins generally associated with SaaS sales. While the company will never truly be a complete SaaS company due to its transaction-based trading operations, management aims for SaaS sales to account for 40% to 50% of total ARR by 2025.
With nine years of consecutive dividend increases, an improving profit margin, and a strong growth runway in anti-financial crime, Nasdaq looks poised to become a Dividend Aristocrat in time, all while delivering promising dividend growth to investors.
Visa: 3.2% maximum dividend potential
With the rise of fintechs and buy now, pay later (BNPL) companies across the financial landscape, the market's sentiment toward Visa (V -0.59%) and its giant network has somewhat deteriorated. With shares dropping over 15% since July, investors are torn as to whether this is a buying opportunity or a sign that the company is losing relevance in today's finance industry.
However, despite the threat BNPL's rise may pose, Visa could actually be poised to benefit from the trend. Speaking to this idea during the company's fourth-quarter earnings call, CEO Alfred Kelly explained: "The majority of the installment payoffs are on cards today. For example, in Canada, over the last year, the number of Visa cards used to repay installments has grown more than 300%."
Furthermore, the company saw a nearly 30% increase in the number of fintechs that issued Visa's credentials, leading to a 100% increase in total payment volume from these customers.
These stats highlight that despite the digital wallets quickly becoming the norm, Visa owns a valuable niche in these wallets and provides the networks needed to make many types of transactions.
Posting a record $2.8 trillion in payment volume during the fourth quarter, Visa saw net revenue growth of 29% year over year -- a far cry from becoming outdated in the financial landscape. Thanks to this growth, its surprisingly solid positioning in the fintech and BNPL industries, and its 13-year dividend increase streak, Visa would make a great core holding for dividend growth investors.
Domino's Pizza: 2.7% maximum dividend potential
Despite posting its first same-store sales decline for the U.S. in 41 quarters, Domino's Pizza (DPZ -1.68%) looks poised to continue dominating the pizza industry for years to come. Despite this U.S. decline, the company posted total revenue growth of 3% year over year for the quarter, driven by strong international sales that grew by 8%.
This growth extended Domino's stunning 111-quarter streak of positive same-store sales internationally, highlighting its continued successful expansion globally. With nearly 12,000 stores outside the U.S., Domino's international growth story is far from over as management projects that its top 15 markets alone could still add over 6,000 new locations.
Furthermore, through the company's "fortressing" of stores, its in-house delivery operations, and rewards program with 27 million active users, Domino's has developed deep, profitable relationships with its customers. By keeping delivery in-house and by focusing on fortressing stores, the company can keep its customers' experiences solely within its hands, generating precious insights that it can use within its rewards program.
Due to this focus on customer experience, the company's remaining international growth runway, and its 10% annualized global sales growth rate over the last decade, Domino's would add great restaurant exposure to any portfolio.