No income investor buys stock of a dividend-paying company with the expectation that it will suspend its dividend at some point. Quite the contrary, dividend investors want these payouts to continue and grow as long as possible – preferably forever. Unfortunately, many companies will, at some point, have to resort to dividend cuts due to business challenges.
However, in my opinion, Visa (NYSE: V) and Novartis (NYSE: Same) They will likely avoid this future, and both are worth investing in and holding on to forever. Let’s look at both.
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Visa, one of the leading payment network companies, has an excellent record of paying dividends. It has been paying a dividend since 2008 when it went public, and has been increasing its payout every year.
Visa can afford it: it generates steady and growing revenues, profits, and cash flow. Its payment network helps facilitate hundreds of millions of credit card transactions every day, with the company taking a small portion of each. Its business also generates excellent profit margins. The company’s gross margins are generally around 80%, while they are typically around $0.50 for every dollar of revenue.
This degree of profitability is rare for a company as large as Visa, but it is no coincidence. Visa’s payment network already exists. Additional transactions add little to no costs, resulting in strong profit margins.
Moreover, Visa’s ecosystem of banks, consumers who hold credit cards bearing its logo, and businesses that accept those cards for payment has become more valuable as it grows, making it a natural example of… Network effect. Visa has few direct competitors worth talking about, and the company isn’t letting the increasing digitization of payments challenge its dominance.
The company is adapting its business to the changing nature of the market Financial industry. Finally, it still has plenty of growth opportunities, with trillions of dollars worth of transactions still being executed outside of the types supported by the Visa network. The continued displacement of cash and digitization of payments will provide a strong long-term supportive force for the company.
Visa is well positioned to deliver excellent returns and consistent earnings growth around the world.
Biopharmaceuticals of the types offered by Novartis are always in high demand. It has been in the pharmaceutical manufacturing business for a long time, and its portfolio includes several “blockbuster” drugs – drugs that generate annual sales of more than $1 billion. It routinely develops newer products to replace those lost sales due to patent expirations and competition.
More importantly for investors, its financial results were generally strong, and the third quarter adhered to that pattern. Revenue rose 9% year over year to $12.8 billion, while earnings per share rose 18% to $2.06. Free cash flow also rose 18% to about $6 billion. It should be able to continue achieving similar results for a period of time despite recent changes to its business.
The company spun off its generic and biosimilars unit as Sandoz Just over a year ago, it has shrunk its clinical-stage pipeline by 40% in recent years. This gives the business less diversity. However, it also prevents the company from spreading its resources too thin, and puts it in a position to focus instead on higher growth opportunities.
Even after reducing the number of its projects, Novartis still boasts dozens of programs in development. The company should be able to continue winning enough new regulatory approvals and rating expansions to keep its revenue and earnings moving in the right direction for a long time. Novartis has also been paying and increasing its dividend for a while. The company’s streak of pay increases stands at 27 consecutive years – an impressive record.
At the current share price, Novartis has a competitive dividend yield of 3.65% – Standard & Poor’s 500The average return is only 1.32%. The pharmaceutical company is committed to rewarding its shareholders in this way, and this is unlikely to change anytime soon. Novartis is a great dividend stock that you can buy and hold forever.
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2 dividend stocks to buy and hold forever Originally published by The Motley Fool