One of the best things about investing is the potential to build streams of passive income -- in other words, income you generate while sitting back and doing nothing. Passive income is a way to make your money work for you, and one of the easiest ways you can do this is by investing in stellar dividend-paying companies.
Dividend stocks can sometimes be risky, but they don't have to be. Some of the best dividend stocks come from companies with strong competitive advantages and an established history of paying and increasing their dividends annually. One stock that checks these boxes is S&P Global (SPGI 0.36%).
High barriers to entry give S&P Global an advantage
S&P Global makes money in a few ways, but its most significant source of revenue is its ratings business.
When companies want to raise money by selling debt, investors must weigh the risks and understand how likely it is that a company can pay off that debt. This is where S&P Global comes into the picture. The company provides credit ratings to corporations worldwide and is an essential player in the fixed-income market.
Credit-rating businesses have a substantial competitive advantage because regulations make it difficult for newer entrants to break into the market. As a result, two companies -- S&P Global and Moody's -- control 80% of the credit rating market internationally.
Its credit rating business has slowed down in 2022
Ratings make up a significant portion of S&P Global's business, accounting for 49% of its total revenue in 2021.
This year, its rating revenue has taken a hit in what Chief Executive Officer Doug Peterson called "an extraordinarily difficult issuance environment." Peterson said that issuance declined across all regions, down 34%, 45%, and 32% in the U.S, Europe, and Asia, respectively. The CEO said that it was "the first time that I can recall seeing declines in every category and every region since I've been doing earnings calls."
After record debt issuance in 2020 and 2021, new corporate debt sales have slowed drastically. Market volatility, accelerating inflation, and rising interest rates have made investors more risk averse, fostering an unfavorable environment for companies looking to issue debt. Revenue in S&P Global's ratings segment fell 26% in the second quarter and 20% through the first six months of 2022.
Its acquisition of IHS Markit helped earnings grow overall
Despite the slowdown in credit ratings, S&P Global has put up solid growth across all of its businesses.
Through the first six months of the year, S&P Global's total revenue was up 31%, and its operating profit soared 51%. This revenue growth is attributed mainly to S&P Global's acquisition of IHS Markit, a company that provides 50,000 customers globally with analytics and other business solutions. S&P Global closed its deal with IHS Markit in March and has included its results in its financial statements since then.
On a pro forma basis (excluding the IHS Markit acquisition), S&P Global's total revenue is down 2% this year -- a testament to its other businesses growing while ratings took a hit.
S&P Global's dividend has grown for 49 consecutive years
S&P Global's rating business gives it a strong competitive advantage, and its earnings from various sources -- including its data, analytics, and index products -- help smooth out its results over time. The business model is asset-light, meaning expenses are low while margins are high. All of this combines to make S&P Global a stellar dividend stock for long-term investors.
S&P Global currently has a modest dividend yield of 0.89%, but it has raised its dividend for 49 years in a row, putting it one year away from joining the exclusive Dividend Kings club. When you take it all together, S&P Global is a stellar long-term performer that has beaten the S&P 500 and offers a solid dividend you can count on.