Dividend investors don't like payout decreases or suspensions, hence the importance of finding companies that are unlikely to resort to these moves. But that's not always easy.
There are plenty of dividend stocks on the market. Many will end up disappointing investors. We recently saw two such examples -- Medical Properties Trust and Walgreens Boots Alliance -- two high-profile dividend payers which slashed their payouts over the past six months.
Investors on the market for dividend stocks that are unlikely to see a payout drop over the long run should find what they seek in Novartis (NVS -1.64%) and Visa (V -0.23%). Read on to discover why.
Novartis: Developing drugs will never be out of style
The pharmaceutical industry is a great place to look for "forever" stocks. Drugmakers develop lifesaving medicines, a business that will be in high demand as long as people fall ill. In fact, demographic trends will increase demand for pharmaceutical products, an interesting consequence of significant medical innovations over the past 100 years.
People live longer, the world's population is aging, and older people need more medical care. Novartis is one of the largest companies in the field and operates across several major therapeutic areas. Last year, the company's net sales increased by a solid 8% year over year to $45.4 billion; its earnings per share came in at $6.47, 18% higher than the previous fiscal year.
The company also made one major change to its business. Novartis spun off its generic and biosimilar unit Sandoz into a stand-alone business, a transaction it completed in October. The new Novartis will be focused on its core biopharmaceutical operations, where it will direct more research and development spending to help speed up pipeline and regulatory progress and accelerate growth.
The company currently has more than 100 programs in its pipeline. Last year, it reported positive data from phase 3 studies for two investigational drugs: remibrutinib, being investigated for the treatment of chronic spontaneous urticaria (chronic hives); and atrasentan in treating a kidney disease called IgA nephropathy. Novartis plans to submit the former for regulatory approval this year.
Launching brand-new medicines will remain a crucial part of Novartis' strategy and allow it to keep its revenue moving in the right direction over the long run, even with the threat of patent cliffs.
This will also help support its dividend program. The company has raised its payouts every year since 1996. The current yield is 3.67%, while its cash payout ratio is still reasonable at just under 62%.
Novartis' innovative abilities, leadership in developing necessary products, and impressive dividend track record make it an excellent choice for investors on the market for forever stocks.
Visa: The cash displacement trend still has room to run
Visa is also betting on an important long-term trend: the decreased use of cash and checks. It has been one of the driving forces behind this change.
It is one of the leading payment networks in the world, serving as an intermediary between the banks that issue credit cards and the merchants that seek to collect payments from customers. Visa pockets a fee for its trouble in every transaction.
Several aspects of this business model make it great. First, since Visa technically does not issue credit cards, it is not exposed to credit risk -- the possibility that consumers will fail to pay back their debts.
Second, Visa's payment network is already up and running. Each additional transaction it processes does little to increase the company's cost of goods sold, meaning it has high gross margins, usually in the neighborhood of 80%.
V gross profit margin data by YCharts.
Third, Visa benefits from the network effect since the more consumers join its ecosystem, the more attractive it becomes to merchants. Knocking Visa off its pedestal will be challenging; its only noteworthy direct competitor is Mastercard. The two entities run a bit of a duopoly.
No wonder, then, that Visa has generally recorded solid financial results. The company should continue down the same road: There is still plenty of space, even in the U.S., to displace cash and check transactions, according to management.
That's saying something, considering the U.S. is one of the most penetrated credit card markets. In other words, the global opportunities are massive.
The dividend should remain healthy, too. Visa has increased its payouts by an incredible 420% in the past decade. Expect it to continue delivering excellent financial and stock market results and dividend hikes for a long time.
