This article was published on Dividend Kings on Tuesday, Jan. 24, 2023.
You might imagine that millionaires might feel better about their prospects, but not really.
With investors losing almost $30 trillion in stocks and bonds last year, inflation still high, and now recession likely coming soon, it's understandable why so many people are pessimistic about their retirement plans.
But I have wonderful news for you.
|Monthly Savings||Inflation-Adjusted Portfolio After 20 Years||Inflation-Adjusted Portfolio After 30 Years||Inflation-Adjusted Portfolio After 40 Years||Inflation-Adjusted Portfolio After 50 Years|
(Source: FactSet, Dave Ramsey)
Dividend blue chips historically deliver about 10% inflation-adjusted returns. That's what they've done for 50 years, and you can still build high-yield income portfolios that are expected to deliver such returns.
That means that almost anyone with enough time or savings can retire an inflation-adjusted millionaire.
But can you really earn 10% inflation-adjusted returns? Yes, you can. In fact, in the medium term you can earn Buffett-like returns on many blue-chip bargains hiding in plain sight.
Don't believe me? Here are some of my blue-chip recommendations that have done just that.
But if you want to earn Buffett-like returns over the long term, or at least returns on par with the greatest investors in history, you need hyper-growth world-beater blue chips like Visa (NYSE:V) and Mastercard (NYSE:MA).
Let me show you why both of these wide-moat growth legends are still potentially excellent additions to a diversified dividend portfolio. But one is the better buy today, while the other is the slightly better long-term buy.
Both could possibly make you rich, but one could possibly make you richer, faster.
While all companies have risk profiles (which we'll address in a moment), Visa is one of the world's best companies. Why?
We think a wide moat surrounds the business and that Visa's position in the global electronic payment infrastructure is essentially unassailable...
Despite the evolution in the payment space, we think a wide moat surrounds the business and view Mastercard's position in the current global electronic payment infrastructure as essentially unassailable." - Morningstar
Morningstar considers Visa's and Mastercard's moats to be essentially bullet proof, and it's not hard to see why.
Mastercard operates in 210 countries in 150 currencies, and Visa operates in 210 countries in 160 currencies.
Last year Mastercard processed $8.25 trillion across its network, and Visa over $14 trillion. That means approximately 21% of the entire global economy is flowing over these processing networks. In 2022 Visa processed 254 billion transactions, 32 for every human on earth.
Each time they process a transaction, they take a cut of the proceeds. They're toll-booth businesses and, unlike Amex (AXP) and Discover (DFS), take no credit risk.
Mastercard can process 5,000 transactions per second, and Visa 65,000. The supposed disruptors to these companies, such as blockchain titan Ether? 15 transactions per second. Granted, sharding is supposed to get that up to "up to" 100,000 per second, but for now, Visa and Mastercard are the only payment processors who can operate at 70,000 transactions per second.
It's arguably the greatest business model on earth because trust, convenience, and network effects are key to their moats.
New research from the Pew Research Center... found that 41% of Americans say none of their purchases in a typical week are paid for in cash. That's up from 29% in 2018 and 24% in 2015." - CNBC
Electronic payments have been growing quickly, and the pandemic has accelerated a cashless economy. Yet even in the US and other developed economies, most people still use cash.
Cash was used for 59% of point-of-sale transactions in 2022, down from 72% in 2019." - ECB
This means that the convenience that Mastercard and Visa offer give both a long-growth runway.
Consider Visa, which is accepted at over 80 million merchant locations worldwide. Almost 15,000 financial institutions use this network. Why? Because Visa and Mastercard are the most trusted names in payment processing.
The 2022 crypto winter showed that blockchain isn't close to being ready to handle people's money. In contrast, businesses are more than willing to trust Mastercard and Visa because that's what their customers use.
The more people use Visa and Mastercard credit and debit cards, the more institutions will sign up to accept them. Is a 1.3% to 2.6% fee something businesses would prefer not to pay? Sure. But guess what? Most businesses end up offering far bigger discounts to drive sales.
Ever heard of a loyalty program? Walgreens has one, and so does PayPal, Dairy Queen, and even Golden Corral.
Do you know what that offer? Cash back in the form of free purchases. Do you know what those loyalty programs run? Between 1% to 10% cash back equivalent for repeat shopping.
Do you think a business with a never-ending 5% to 10% sale cares about 1.3% to 2.6% transactions? Not if all their customers have those cards and are willing to spend more.
I said these were the best businesses on earth, and here's the proof.
The margins on this low-capex business are insane. 50% net profits and 45% to 61% free cash flow margins.
Why is Visa more profitable than Mastercard? Simply because it's bigger and has better economies of scale. But as Mastercard grows larger, its margins should rise to match Visa's.
These companies take no credit risk, run 20% of the global economy through their networks, and take obscenely profitable cuts.
It costs Visa less than $900 million annually to keep its network operating, which is why it mints free cash flow to the tune of $18 billion annually. That's why it buys back so much stock and pays rapidly growing, very safe dividends.
Mastercard? It's grown its dividend at 41% annually for the last decade and has a 19% free cash flow payout ratio.
60% FCF payout ratios are considered safe for this industry, and that, plus a mountain of cash, and more arriving every day, is why these are such safe companies.
Do you know how much cash Visa has right now?
$21 billion, almost enough to pay off all of its debt instantly, if it wanted to.
And its annual free cash flow is also almost enough to repay its debt. But with an average borrowing cost of 2.75% (0.5% after long-term inflation), why would it?
Every dollar Visa invests in its business generates a cash return on invested capital of 48%. And its borrowing costs are 0.5% after inflation.
What about Mastercard?
It has more net debt than Visa, but its net debt/EBITDA ratio is 0.5. Rating agencies consider 3.0X or less net leverage safe.
Or, to put it another way, Mastercard's safe debt limit, according to S&P, Fitch, and Moody's is $49 billion. It could borrow $35 billion without losing its investment-grade credit rating.
MA's growth spending is growing more rapidly than Visa's. It's expected to triple in the next three years. That's because Mastercard has 1/13th the network capacity of Visa, running roughly half the transaction volume.
Or, to put it another way, Visa started out building out a lot more capacity than it needed. It can now simply maintain its network and let the world's demand for payment processing catch up to its capacity.
Yet even with Mastercard expected to spend 2X as much for growth in 2026, MA is still expected to generate incredible free cash flow, which means generous buybacks, and fast-growing dividends.
Ok, these companies sound amazing, but doesn't sky-high profitability come with its own risks?
Your margin is my opportunity." - Jeff Bezos
Indeed it does, so let's address their risk profile.
There are no risk-free companies, and no company is right for everyone. You have to be comfortable with the fundamental risk profile.
A lot can go wrong with such dominant and insanely profitable businesses. The biggest are regulations and disruption for competing technologies, though both Visa and Mastercard are investing millions into fintech startups to avoid being blindsided.
Be short these companies and anybody that lives off of this 2 or 3% (transaction) tax, and be long well-thought-out, Web3 crypto projects that are rebuilding payments infrastructure in a completely decentralized way." - Chamath Palihapitiya (king of SPACs)
That's what the king of SPACs said on January 3rd, 2022, the day the market peaked. He said to short Visa and Mastercard with impunity, saying they will be the big losers of 2022.
To say that prediction didn't age well would be an understatement.
Here are how all of Chamath's SPACs did in 2022.
And here's how they are doing since the spec tech bubble peaked in February 2021.
Literally, no investor who bought into Chamath's SPACs made any money unless they cashed out at the top (as he did).
And here's how Mastercard and Visa did in 2022.
Investors who shorted MA and V in 2022 broke even after the cost of carrying the short, much better than investors in Chamath's SPACs.
In 2021, some said Chamath might be "the next Warren Buffett."
And we can't forget Cathie Wood's predictions about 45% annualized returns long into the future.
It's amusing to poke fun at a discredited carnival barker money managers who got lucky during the Pandemic, speculative mania. But there are indeed lots of companies out to eat Mastercard's and Visa's lunch.
So how do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.
DK uses S&P Global's global long-term risk-management ratings for our risk rating.
The DK risk rating is based on the global percentile of how a company's risk management compares to 8,000 S&P-rated companies covering 90% of the world's market cap.
S&P's risk management scores factor in things like:
ENB's Long-Term Risk Management Is The 33rd Best In The Master List 93rd Percentile In The Master List)
|Classification||S&P LT Risk-Management Global Percentile|| |
|BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL||100||Exceptional (Top 80 companies in the world)||Very Low Risk|
|Strong ESG Stocks||86|| |
Very Low Risk
Very Low Risk
Very Low Risk
|Foreign Dividend Stocks||77|| |
Good, Bordering On Very Good
|Ultra SWANs||74||Good||Low Risk|
|Dividend Aristocrats||67||Above-Average (Bordering On Good)||Low Risk|
|Low Volatility Stocks||65||Above-Average||Low Risk|
|Master List average||61||Above-Average||Low Risk|
|Dividend Kings||60||Above-Average||Low Risk|
|Hyper-Growth stocks||59||Average, Bordering On Above-Average||Medium Risk|
|Dividend Champions||55||Average||Medium Risk|
|Monthly Dividend Stocks||41||Average||Medium Risk|
(Source: DK Research Terminal)
The MA and V risk-management consensus is in the top 23% of the world's best blue chips and is similar to:
The bottom line is that all companies have risks, and V and MA are very good, at managing theirs, according to S&P.
When the facts change, I change my mind. What do you do, sir?" - John Maynard Keynes
There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead, we always follow. That's the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.
Visa has a slightly higher credit rating and slightly better risk management, and is more profitable. So that makes it the clearly better buy right?
What about valuations?
Is Visa more undervalued? By about 10%. So that tears it; it's the better buy, right?
Is Visa historically more undervalued? Yes. Does that technically make it a better buy? Yes. But in terms of return potential, Visa is slightly better than Mastercard for the next few years, but within five years, Mastercard could surpass it.
There is only one kind of investor buys Visa or Mastercard, a dividend growth investor.
|Investment Strategy||Yield||LT Consensus Growth||LT Consensus Total Return Potential||Long-Term Risk-Adjusted Expected Return|
|ZEUS Income Growth||4.1%||8.5%||12.6%||8.8%|
|Schwab US Dividend Equity ETF||3.4%||8.6%||12.0%||8.4%|
|Vanguard Dividend Appreciation ETF||1.9%||10.0%||11.9%||8.3%|
|60/40 Retirement Portfolio||2.1%||5.1%||7.2%||5.0%|
(Source: DK Research Terminal, FactSet, Morningstar)
Both Visa and Mastercard are expected to run circles around almost any investment strategy on Wall Street, including the S&P, dividend aristocrats, and the Nasdaq.
|Time Frame (Years)||7.9% CAGR Inflation-Adjusted S&P 500 Consensus||14.4% Inflation-Adjusted V Consensus||20.5% CAGR Inflation-Adjusted MA Consensus||Difference Between Inflation-Adjusted MA Consensus And S&P Consensus|
(Source: DK Research Terminal, FactSet)
If both companies grow as expected for the next 20 years, V could 15X your money, adjusted for inflation, while MA could be a 42X return.
|Time Frame (Years)||Ratio Inflation-Adjusted MA Consensus/VA Consensus||Ratio Inflation-Adjusted MA Consensus vs. S&P consensus|
(Source: DK Research Terminal, FactSet)
MA offers the potential for 3X the long-term returns of V and 9X that of the S&P 500.
Let me be clear: I'm NOT calling the bottom in MA or V (I'm not a market-timer).
Ultra SWAN quality does NOT mean "can't fall hard and fast in a bear market."
Fundamentals are all that determine safety and quality, and my recommendations.
While I can't predict the market in the short term, here's what I can tell you about MA and V.
These are arguably the best businesses in the world. They are toll-booth operators for international commerce, with 21% of global GDP running through their networks.
Decades of brand-building and trust among both consumers and financial institutions create moats so wide that Morningstar calls them "unassailable."
While no moat is truly impervious, these A and AA-rated fintech titans have 82nd and 84th-percentile risk management and mountains of cash to deal with any challenges that might come up.
They generate rivers of free cash flow which they use to cement their moats and shower investors with buybacks and very safe, hyper-growth dividends.
Owning both is as close to a "no-brainer" decision as you can make in a diversified dividend growth portfolio.
Today Visa is about 17% undervalued, and Mastercard is about 7% undervalued. Visa is technically the better buy.
But if I had to buy just one, and indeed I only own one of them in my family hedge fund, it would be Mastercard.
Mastercard is smaller, growing 6% faster, and as its economies of scale ramp up, its margins should approach those of Visa.
That's because Mastercard's superior growth should result in its returns surpassing those of Visa within five years, and long-term, it has 3X the return potential of its larger competitor.
In other words, Mastercard is like Lowe's (LOW), and Visa is like Home Depot (HD). Both are amazing industry titans worth owning, but I recommend Mastercard when it comes to very low-risk Ultra SWAN hyper-growth.
Dividend Kings helps you determine the best safe dividend stocks to buy via our Automated Investment Decision Tool, Zen Research Terminal, Correction Planning Tool, and Daily Blue-Chip Deal Videos.
Membership also includes
Access to our 10 model portfolios (all of which are beating the market in this correction)
my correction watchlist
50% discount to iREIT (our REIT-focused sister service)
real-time chatroom support
real-time email notifications of all my retirement portfolio buys
numerous valuable investing tools
Click here for a two-week free trial, so we can help you achieve better long-term total returns and your financial dreams.
This article was written by
Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).
I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.
My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.
With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.
Disclosure: I/we have a beneficial long position in the shares of MA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: DK owns MA and V in our portfolios.