Investing for dividend growth is one of the most common investing strategies. And it isn't hard to see why this is the case: Buying great businesses and measuring how much income they provide for you is a good barometer of your progress on the road to financial independence.
With that in mind, here are two stocks that have been proven dividend growers in the past decade, and that could remain that way in the future.
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1. Visa: Cashing in on payment method trends
The convenience of payment methods like debit cards and credit cards is prompting more people around the world to integrate these payment methods into their consumption habits. And as developing markets continue to grow in prosperity and participate more in the mega-trend of e-commerce, these payment methods should gain even more steam.
Visa (V -0.23%) is uniquely poised to win thanks to this trend. The company's roughly $490 billion market capitalization positions it as the largest payments processor in the world, with more than $100 billion in market value separating it from its closest rival, Mastercard. Visa's billions of cards in circulation and billions of customers make it too juicy in terms of potential sales for merchants to pass up. This gives the company a wide competitive moat and could drive further acceptance of its payment network.
That is why analysts are predicting that Visa's non-GAAP (adjusted) diluted earnings per share (EPS) will compound by 14.5% annually through the next five years. For context, that's more than the credit services industry average annual earnings growth projection of 13.9%.
Visa's 0.8% dividend yield doesn't stand out compared to the 1.5% yield of the S&P 500 index. But with a dividend payout ratio -- how much profit is devoted to dividend payments -- of just 20%, the company makes up for this low starting point with robust future growth potential. That's why I believe Visa can build on its 10-year cumulative dividend growth rate of 446% in the years to come.
Dividend growth investors can pick up shares of Visa at a forward price-to-earnings (P/E) ratio of about 24. Considering that the credit services industry average forward P/E ratio is 18.2, this isn't an excessive valuation for a stock of Visa's quality.
2. BlackRock: Asset managers will always remain in high demand
Managing $9.4 trillion in assets as of June 30, BlackRock (BLK 0.69%) is single-handedly the most dominant asset manager on the planet. Whether you believe that we are currently in a bull market or are still in a bear market, that doesn't matter in the grand scheme of things for BlackRock.
This is because, for one, it's basically a guarantee that financial markets will climb in the long run. This alone will push up BlackRock's assets under management (AUM) in the years ahead, resulting in rising investment advisory fees/revenue and adjusted diluted EPS. BlackRock is also adding hundreds of billions of dollars to its AUM base through net inflows into its funds, which have mostly outperformed their benchmarks in the past five years.
For these reasons, analysts think the company's adjusted diluted EPS will increase by an annual rate of 9.8% for the next five years. On top of this healthy growth forecast, BlackRock's 2.6% dividend yield is enticing. This is especially the case given that the dividend has surged higher by 198% in the past 10 years.
BlackRock's shares can be acquired at a forward P/E ratio of 18.5, which is well above the asset management industry average forward P/E ratio of 12.8. For investors who plan on owning the asset manager for at least 10 years, this valuation multiple still looks reasonable.
