Dividend growth stocks are some of the best ways to build wealth. A consistently growing dividend signals from management that it expects strong profit growth and a stable balance sheet well into the future.
According to a study from Hartford Funds, stocks that initiated or increased their dividends dramatically outperformed stocks that didn't pay dividends over the last 50 years. And it's not even close. Dividend growers and initiators averaged a total return of 10.24% from 1973 through 2022, while non-payers averaged returns of just 3.95%.
Two stocks that have rapidly increased their dividend payments to shareholders over the last half-decade, Visa (V +1.23%) and Mastercard (MA +1.76%), have managed to outperform non-dividend payers in that time. Since 2019, both stocks have doubled their dividends (or better), and investors should expect them to double again in the next half-decade.
The ultimate competitive advantage
Visa and Mastercard aren't exactly credit card companies. They don't lend money, they don't collect interest, and they don't charge any fees to consumers. They are payment network operators. They sit in the middle of a consumer and their bank and a merchant and their bank, and they ensure payments make it from one account to the other.
Visa counts over 130 million merchant locations in over 200 countries and territories where its payment cards are accepted. Mastercard isn't accepted in quite as many merchant locations worldwide, but it still boasts a presence in over 210 countries and territories. By comparison, American Express counts just 80 million merchant locations worldwide despite a huge effort to increase acceptance since 2017.
NYSE: V
Key Data Points
It will take a competitor years, even decades, to catch up with the level of acceptance of Visa or Mastercard. In the meantime, both payment networks are working to extend their leading positions.
So, when a bank is issuing a new credit or debit card, especially one targeted toward international travelers, they naturally partner with Visa or Mastercard. That creates a virtuous cycle whereby more consumers have Visa or Mastercard payment cards, pushing more merchants to accept those payment methods.
While payment companies are subject to the cyclicality of the global economy, Visa and Mastercard have a secular trend working in their favor: The ongoing shift away from cash. While many consumers in the U.S. make the vast majority of their purchases using non-cash payments, like credit and debit cards, that's not the case in many parts of the world. Even in Europe, where Visa and Mastercard have a bigger advantage, the majority of transactions still use cash payments. That leaves a lot of opportunity for the payments companies to grow their businesses.
Why both Visa and Mastercard could double their dividends again
The secular shift away from cash will propel Visa and Mastercard's profits higher over the long run despite the inevitable ups and downs of the economy. That's driven by the fact that each additional transaction on Visa's and Mastercard's networks comes with minimal marginal costs. So, each extra swipe practically puts more money in shareholders' pockets.
And I mean that quite literally. Both Visa and Mastercard return nearly all their free cash flow to shareholders. And despite both doubling their dividend payments over the last few years, the bulk of their capital return programs favor share repurchases.
Visa announced a new $25 billion share repurchase authorization when it reported its fourth-quarter financial results in October. That represents about 5% of its shares. Meanwhile, its dividend payment will total about $4.25 billion annually, based on its current share count.
NYSE: MA
Key Data Points
Likewise, when Mastercard announced its latest dividend increase in December, it also reported an $11 billion share repurchase authorization. Its dividend payments will total less than $2.5 billion in 2024.
All that to say, both Visa and Mastercard have favored the greater flexibility of share repurchases in their capital returns programs. But that also leaves them a lot of room to keep increasing their dividends year after year. With the substantial free cash flow that both companies can generate from leveraging their leading payment networks, they should be able to keep growing their dividends at the same rapid pace we've seen over the last five years.
Even with both companies' shares trading around all-time highs, the stocks offer long-term investors great opportunities to continue outpacing the broader market.
