2 supercharged dividend growth stocks to buy when there's a stock market sell-off

MasterCard (NYSE:MA) today has a dividend yield of about 0.6%. Visas (NYSE:V) the yield is only slightly higher, about 0.8% or so. While these numbers probably won't appeal to many dividend investors, this one will: Both payment processors have delivered annualized dividend growth rates in the mid-teens over the past decade. In other words, they are dividend growth stocks with an impressive dividend history. Here's why you'll want them on your wish list for the next big market sale.

What Visa and Mastercard do

Visa and Mastercard are the No. 1 and No. 2 payment processors, respectively. That basically means consumers are using their cards (you're probably familiar with their logos) to buy things. Visa and Mastercard ensure that the transactions are processed using their own computer networks and work with the merchant and the banks to ensure that everyone credits and debits correctly. It sounds simple, but it really isn't, due to the increasing issues around fraud and reliability.

What both companies offer is a service, and they charge a fee for that service. They basically collect a small percentage of every transaction they handle. However, considering the number of transactions using cards decorated with their logos, the small fees add up to huge revenue. More and more transactions are being made through their networks as customers move away from cash or buy in places where cash is simply not an option (online shoppingFor example).

This has resulted in years of strong growth. The downside is that both Visa and Mastercard have dominant positions in the industry and are often in battle with regulators retailers about their fees. That could one day pose a serious risk, but so far it hasn't slowed this pair's growth. Both have rewarded dividend growth investors with annualized dividend growth of 23% and 18% respectively over ten years. More recent increases have been reliably in the mid-teens for both companies.

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A valuation problem for investors

Of course, investors are well aware of the success these two companies have achieved. The shares are priced accordingly, delivering modest returns. Notably, they are both trading near all-time highs. While an argument can be made from a valuation perspective, as key metrics such as price-to-earnings ratios and price-to-sales ratios are both below their long-term averages, it would be difficult to suggest that either is exactly a screaming buy if you are a dividend growth investor looking is for a little more return.

That doesn't mean you should simply ignore the couple. You should just keep them on your wish list, with the ambitious goal of adding them during a market downturn. The market can become irrational in difficult times and throw the baby out with the bathwater. If Visa and Mastercard get caught up in that sale, you could be in for a much more compelling buying opportunity. Of course, that might only mean a dividend yield of about 1%, but in percentage terms that would be substantially higher than their current yield. Notably, both stocks have experienced a 25% decline in recent years, so it's not outlandish to think a similar decline is in the offing.

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The problem with this logic is that now you have to do your homework. You want to feel comfortable that they offer solid long-term appeal before the market collapses. Otherwise, you probably won't have the strength to counter the widespread selling that is likely to occur. In other words, decide now so you can take action later when fear makes it harder to pull the trigger.

A worthy pair to keep an eye on

Visa and Mastercard are well-run, industry-leading companies. While you could argue that they look relatively attractive at the moment based on more traditional valuation measures, their returns are still quite stingy and the shares are near all-time highs. For dividend growth investors looking for a healthy mix of yield and dividend growth, this is probably not the best time to buy either. But if a deep bear market puts these supercharged dividend growth stocks in the deep discount bin, you'll want to jump at the chance to own them. Just make sure you decide now so you don't let fear stop you from buying when the opportunity finally presents itself.

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Ruben Gregg Brouwer has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in 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 one disclosure policy.

2 supercharged dividend growth stocks to buy when there's a stock market sell-off was originally published by The Motley Fool

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