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2 Supercharged Dividend Growth Stocks to Buy if There’s a Stock Market Sell-Off

In Business
April 28, 2024

Mastercard (NYSE: MA) has a roughly 0.6% dividend yield today. Visa’s (NYSE: V) yield is only slightly higher at about 0.8% or so. While those figures probably won’t appeal to many dividend investors, this one will: Both of these payment processors have mid-teen annualized percentage dividend growth rates over the past decade. In other words, they are dividend growth stocks with impressive dividend histories. Here’s why you’ll want them on your wish list for the next big market sell-off.

What Visa and Mastercard do

Visa and Mastercard are the No. 1 and No. 2 payment processors, respectively. That basically means that consumers use their cards (you probably know their logos well) to buy things. Visa and Mastercard make sure that the transactions are taken care of using their proprietary computer networks, working with the merchant and the banks to get everyone credited and debited appropriately. It sounds simple, but it really isn’t, due to increasing issues around fraud and reliability.

What both companies offer is a service, and for that service, they charge a fee. They basically collect a small percentage of every transaction they handle. However, given the number of transactions that use cards adorned with their logos, the small fees add up to huge revenue. More and more transactions are being done across their networks as customers shift away from cash or buy in places where cash just isn’t an option (online shopping, for example).

This has resulted in years of strong growth. The downside is that both Visa and Mastercard have dominant industry positions and are frequently fighting with regulators and retailers about their fees. That might pose a serious risk someday, but so far, it hasn’t slowed growth for this pair. Both have rewarded dividend growth investors with 10-year annualized dividend growth rates of 23% and 18%, respectively. More recent increases have reliably been in the mid-teen percentages for both companies.

V Chart

V Chart

A valuation problem for investors

Of course, investors are well aware of the success these two companies have achieved. The stocks have been priced accordingly, giving them modest yields. Notably, they are both trading near all-time highs. Although there’s an argument to be made from a valuation standpoint, with key metrics like price-to-earnings and price-to-sales ratios both below longer-term averages, it would be hard to suggest that either is exactly a screaming buy if you are a dividend growth investor looking for a bit more yield.

That doesn’t mean you should simply ignore the pair. You should just keep them on your wish list, with the aspirational goal of adding them during a market downturn. The market can get irrational during difficult times and throw out the baby with the bathwater. If Visa and Mastercard get caught up in that selling, you could find yourself with a much more attractive buying opportunity. Of course, that might only mean dividend yields of about 1% or so, but that would be materially higher than their current yields on a percentage basis. Notably, both stocks have experienced 25% share price declines in recent years, so it isn’t an outlandish expectation to think that a similar drop could be ahead.

V Chart

V Chart

The problem with this logic is that you need to do your homework now. You want to be comfortable with the fact that they offer solid long-term appeal before the market hits the skids. Otherwise, you probably won’t have the fortitude to go against the broad-based selling that will likely be taking place. In other words, decide now so you can act later when fear will make it more difficult to pull the trigger.

A worthy pair to monitor

Visa and Mastercard are well-run, industry-leading companies. While you could argue that they look relatively attractive right now based on more traditional valuation metrics, their yields are still pretty miserly, and the shares are near all-time highs. For dividend growth investors looking for a healthy mix of yield and dividend growth, now probably isn’t the best time to buy, either. But if a deep bear market puts these supercharged dividend growth stocks into the deep discount bin, you’ll want to jump at the chance to own them. Just make sure you decide that now so you don’t let fear deter you from buying when the opportunity finally arises.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

2 Supercharged Dividend Growth Stocks to Buy if There’s a Stock Market Sell-Off was originally published by The Motley Fool

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