This Sector Is the Dividend Juggernaut of the Future
Mar 29th 2012 2:53PM
Updated Mar 29th 2012 5:02PM
There's not an investor out there who doesn't like a free payout from his or her investment. According to data collected by FactSet, as of the fourth quarter of 2011, 393 of the 500 companies in the S&P 500 index were paying a dividend. This is the highest level seen since 1999 and is all the more reason that we should be keeping our eyes peeled for the next great dividend.
There are two ways we can do this: First, we can go with traditionally strong dividend sectors like energy, utilities, and real estate investment trusts that pay out a significant portion of their income as a dividend. The other method is to look for stocks or sectors that are rolling in cash that could become the next great thing when it comes to a quarterly dividend check.
Today, I want to share with you my pick for the next great income-producing sector -- and for those of you at home guessing, no, it's not technology.
My sector choice for dividend juggernaut of the future is the credit card services industry.
If you think about it, owning credit service companies makes a lot of sense from varying perspectives. In terms of MasterCard (NYS: MA) and Visa (NYS: V) , neither of these two have any risk of default built into their future growth. The reason is that these two are just credit card processors and don't actually extend loans to consumers and hold balances on their portfolios -- that's the banks' job. As simple transaction facilitators, these two should grow like wildfire as consumers are increasingly turning to plastic to get their transactions done.
According to a statement by MasterCard's CFO, Martina Hund-Mejean, 85% of the world's transactions are still done in cash. That gives tremendous potential to MasterCard and Visa to grow their processing services in emerging markets and gives them all the potential to pay out enormous dividends in the future. MasterCard recently doubled its dividend and is currently sitting on nearly $5 billion in cash. Similarly, Visa boasts $2.7 billion in cash with no debt and could easily move its dividend higher even with an existing share repurchase program already in place.
It's a party and you're all invited
This isn't just a story about credit card processors, though. American Express (NYS: AXP) and Discover Financial Services (NYS: DFS) , which play both sides of the field -- processing and lending -- are beginning to see a healthy burst in their earnings and, subsequently, their payouts.
After not raising its dividend since 2007, American Express announced that it is boosting its payout by 11% to $0.20 quarterly in light of it passing the Federal Reserve's stress test. In addition, American Express also announced a 150 million share repurchase program.
Last week, Discover Financial blew away Wall Street's earnings predictions and reported growth among all of its lending and processing divisions. This comes on the heels of a mid-March announcement that it was doubling its share repurchase program to $2 billion after boosting its quarterly dividend by 67% in the previous quarter.
Even pre-paid debit services are getting in on the act. Green Dot (NAS: GDOT) , which relies heavily on Wal-Mart for its revenue stream, forecast total operating revenue to increase by 20% to 24% in the coming year with gross dollar volume increasing by more than 30%. The company also recently inked deals with Rite Aid and Sears Holdings' Kmart. With just over $200 million in net cash and high levels of growth predicted, a dividend here seems likely.
The dividends in this sector (minus Green Dot, which still does not pay a dividend) might seem minuscule now, but they have the opportunity to grow into giants. Emerging-market growth is fueling this sector's outperformance regardless of economic conditions and giving this sector the upper hand for future dividend increases.
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At the time this article was published Fool contributor Sean Williams owns puts on Sears Holdings, but has no material interest in any other companies mentioned in this article. He would be lost without his rewards card. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of MasterCard and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Visa and Wal-Mart, as well as creating a diagonal call position in Wal-Mart and writing covered calls on American Express. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always of interest without charging interest.
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