Crazy Visa Statistics

When you think of a dividend paying stock, Visa does not immediately come to mind. You might change your mind as you drool over these stats:

  • Payout ratio: 18.33%
  • Dividend Coverage Ratio: 545.69%
  • 3 Year Growth Rate: 38.2%
  • 5 Year Growth Rate: 33.1%
  • 10 Year Growth Rate: N/A

According to Tim, Visa [is] Probably The Best Investment You Can Make Today. I have to agree and that’s why Visa is now my third largest holding by market value after Apple and Kinder-Morgan. Altogether it only contributes $41.83 per year in dividends (now $50.19 after yet another 20% increase!). If I sold Visa and bought BP I could have close to $300 per year. However, I’m not looking for income now or even in the next 10 years; my thoughts are 20+ years down the road. As you will shortly see, the dividend growth projections based on the 30 Year Dollar-Cost Averaging model, which is available from my spreadsheets page, are just crazy!

For the growth stocks with high rates of dividend increases like Visa, the model does fall apart rather dramatically. In the model’s current iteration, you pick a constant expected annual stock appreciation, initial dividend yield, and an expected annual dividend yield increase. There’s currently no way to say that you want a certain percent for x number of years and then drop that percent to something more typical for the remainder. I’ll have to try and program in that functionality in a future version.

To be as “fair” as possible when I use this for a more traditional company, like Coca Cola, I just take a look at the average stock appreciation over a long period and then the average dividend growth over 10-20 years. That works for a typical stock like Coca Cola.

However, using data from Gurufocus, Visa has a 5 year dividend growth rate of 33.1% and a CAGR of 32.6%. After plugging that data into the 30-year DCA spreadsheet, these are the results:

With a single initial investment of $5000 and then reinvested dividends:
Year 5: Annual dividends: $123. Total value: $21,200
Year 10: Annual dividends: $531. Total value: $89,944
Year 15: Annual dividends: $2,297. Total value: $381,851
Year 20: Annual dividends: $9,944. Total value: $1.6 million
Year 30: Annual dividends: $186,695. Total value: $29.3 million

This obviously cannot happen. Visa will have to stop growing as fast and slow the rate of their dividend increases. If it continues ad infinitum as it has the past 5 years, by the time I’m approximately 60, that one time investment of $5000 into Visa will be worth $29.3 million. Even considering inflation, that’s a good return!

Here’s a more realistic model. Initial $5000 investment. 9% a year stock growth and dividend increases at 15%. If you play around with the spreadsheet yourself you’ll see that growth becomes exponential anytime the dividend growth rate is significantly higher that the stock appreciation over a long enough period.
Year 5: Annual dividends: $69. Total value: $8,013
Year 10: Annual dividends: $146. Total value: $13,003
Year 15: Annual dividends: $314. Total value: $21,449
Year 20: Annual dividends: $689. Total value: $36,143
Year 30: Annual dividends: $3633. Total value: $112,520

Much better numbers on the second model. I’d expect Visa to do better than 9% a year and 15% dividend increases for at least the next 5 years. After that, your guess is as good as mine.

Here’s the spreadsheet to play around with: Please only edit the highlighted data so you don’t break the functions for others. If you want a version that you can edit as much as you want, please visit my spreadsheets page.

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8 Responses

  1. Absolutely nailed it Scott. It is this growth that I view Visa as a very viable dividend growth stock. Based on my experience with the way Visa (and MasterCard) make their money through interchange fees, their revenues and growth is really limitless for as long as people use credit cards. And unlike American Express, the can have all the fun of charging fees without carrying the liability of folks not paying off their debt. Your sizable position will pay off over the next several years as they continue to increase their payouts.
    writing2reality recently posted…Wait, More Spreadsheets? Hello, Dividend Growth PortfolioMy Profile

    • scott says:

      It sure will be fun to watch the payouts increase over the next several years. While I don’t want to immediately be 20 years older, it sure will be fun to look back on these types of purchases (and this blog) and see the incredible growth. In fact, I’m hoping to add some more high dividend growth companies into the mix shortly. I don’t especially need the dividend income now so can afford to give up some of that in exchange for larger profits in the future.

  2. Brent @ AAI says:

    I’m with you on Visa. The yield is low now but so is the payout ratio. These huge 20% dividend increases start to snowball after a while. Thanks for the spreadsheet, I’ll have to play around with it.

    • scott says:

      Brent, I wish I had gotten into Visa when they first had their IPO a few years back. The snowball would have been rolling already! Have fun with the spreadsheet. It is a cool way to dream big. I’m going to try and update it with the ability to change the dividend growth rate over time. Right now you have to pick the same growth rate over a 30-year period. It would be much more realistic for Visa to pick a few more years of these (unsustainably) high dividend growth rates and then drop it down to something more realistic for the longterm. I’ll update the site when I figure out a way to make that work.

  3. Scott,

    I love Visa. Wish I owned more than five shares. I hope to rectify that at some point.

    I valued shares a while back using a two-stage DDM analysis. I used 20% growth for years 1-10 and then an 8% terminal rate after that. The model actually spit out a number almost dead on to what some analysts had it pegged at.

    Glad to be a fellow (smaller) shareholder! 🙂

    Best regards.
    Dividend Mantra recently posted…Recent BuyMy Profile

    • scott says:

      DM,

      Great pick on buying more IBM. It is something that I’m considering adding to as well…if only I had more cash around. I’d love to be able to dollar-cost average down. IBM will be around for years to come. I’m liking the spending that IBM is doing on R&D; things like that don’t necessarily pay off immediately but will only serve to position them well into the future. Thanks for visiting!

  4. Really interesting points! Really hope to get invested in V and MA someday soon. They’re definitely on my watchlist, but I currently don’t really like the valuations on either. What’s your opinion on MA as well? I know they’re not as appealing as V from a DGI perspective, but they have yet to cut their dividend, afaik. And duopolies are always nice to own!
    DividendDeveloper recently posted…Dividend Stock Analysis – PCPMy Profile

    • scott says:

      Thanks, DividendDeveloper. I think MA is another great choice. Wish I had bought both at their IPO! For the younger investors like ourselves, any of these higher growth but lower dividend paying companies would make an excellent choice.

      Get the stock appreciation now and then collect the dividends in the future. Owning both would work well. They are both some of the few higher valuation companies that I feel are actually worth their higher PE ratio.

      For example, while I love Amazon from a consumer standpoint, I don’t necessarily from a business/investing standpoint. To even have a PE ratio you need to have positive earnings, which Amazon does not. However, I feel the 29 and 35 of MA and V, respectively, are actually appropriate.

      I’m hoping to try and keep up with the rapid increase in your net worth/ portfolio. You’ve been on a roll!

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