A common misconception among novice investors is that picking growth stocks is necessary to generate lucrative portfolio gains. Often the best performing stocks are actually blue chip companies that grow their revenue and profits steadily and consistently over long periods of time. In turn, these companies can reward shareholders in the form of a dividend.
Warren Buffett perfected this approach to portfolio management. Are Berkshire Hathaway portfolio owns very few smaller growth stocks. Instead, Buffett is known for taking positions in leading brands with strong cash flow and dividend payments.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
One Buffett share it looks particularly tempting right now, it’s a credit card company Visa (NYSE:V). Below I will explore why Visa is a solid choice for passive income and assess how owning the stock for decades could be a wise move.
On October 29, Visa reported financial and operating results for its fiscal fourth quarter and full year 2024. One of the highlights of the report was that Visa’s board of directors approved a 13% increase in the company’s quarterly dividend, making this came to $0.59 per quarter. part.
As the chart below shows, Visa has steadily increased its dividend since the company’s initial public offering (IPO) in 2008.
Investors hold onto dividend stocks for several reasons. For retirees, dividend income can be a good source of cash and help prevent you from dipping into your savings for unnecessary reasons.
Younger demographics may also want to expand their holdings with reliable dividend players.
The chart above shows how Visa stock has performed since its IPO, both on a standalone and on a total return basis. The big difference between these two lines is that the total return involves reinvesting dividend income into Visa stock, rather than receiving the payment in cash. As you can see, reinvesting dividends has significantly increased Visa’s long-term returns.
Unlike retirees, younger investors may not need to top up their savings every month or quarter. But as the chart makes clear, reinvesting dividend income into your stock portfolio can increase your profits in a material way.
An important thing for dividend investors to consider is whether or not these payments are sustainable. In other words, does the company in question have the financial resources to not only pay a dividend, but hopefully also increase it?
Some good metrics to help determine the answer to this question are free cash flow and payout ratio. Free cash flow measures a company’s excess profits after capital expenditures (capex), making it a potentially more useful and accurate assessment of profitability compared to net income. Additionally, the payout ratio helps investors get an idea of how much of a company’s profits are returned to shareholders in the form of dividends.
For Visa, it is important that the company balance shareholder rewards while maintaining sufficient liquidity to invest in product development, cybersecurity protocols and expansion efforts such as acquisitions – all key areas for the highly intensive credit card payments industry.
As the chart above shows, Visa has done a great job of generating free cash flow growth over the long term. The company has used these profits to increase its dividend.
These trends suggest that Visa has room to continue investing in growth opportunities while continuing to maintain (and likely increase) its dividend over the long term. To me, Visa stock is a no-brainer for investors looking for growth and passive income – a pretty rare combination. Right now, it seems like a great opportunity to pick up Visa stock and prepare to hold on for decades to come, just as Buffett often encourages investors to do.
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 872% – a market-shattering outperformance compared to 175% for the S&P 500.*
They just revealed what they believe to be the 10 best stocks for investors to buy now…
View the 10 stocks »
*Stock Advisor returns November 4, 2024
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has and recommends positions in Berkshire Hathaway and Visa. The Motley Fool has a disclosure policy.
Do you want passive income for decades? Buy These Warren Buffett Stocks and Hold On, Originally published by The Motley Fool
