Growth Plays Dividend Investors Can Love
Dividend investors get a leg up on other investors because a company that shares profits is much more likely to be a quality company. Or should I say, it’s much more likely that you will be able to find quality companies by this attribute. The discipline required to consistently make a profit is hard in any business and only the highest quality ones can increase them over time. A dividend can assist you to find these companies because a profit that is paid out can’t be faked. At least not for the long term.
But should you never invest in so called growth companies? If you have been an investor for some time you will realize that growth and dividends are not mutually exclusive, but generally speaking many pure play growth companies don’t pay dividends. And, many investors have yield thresholds such that they do not consider companies that have very low or non-existent yields.
Can you still easily find quality growth companies to invest in and should you buy them? The answer of course is YES. Today, I’m going to provide a few “growth” investment opportunities that are so obvious that you really should buy them whenever they become attractive. They have businesses with large moats, great management, a consistent track record and in some cases (small) dividends.
Here is the list.
The two largest credit card companies, Visa (V) and Mastercard (MA) have a virtual monopoly on the credit and debit card businesses for consumers. AMEX (AXP) has a strong position in the market for corporate, small business and high net worth individuals. These three companies have built out worldwide networks and have tremendous growth opportunities ahead of them. The likelihood of some other competitor entering the market is low.
Also, the business model for Visa and Mastercard companies is simply as a transaction processor. They don’t actually take on any credit risk for the customers who use their service!
Perhaps the biggest threat to these companies is regulatory. However, the government has tried to rein in these companies to limited success.
Consider what has happened over the last 10 or so years:
- eBay’s (EBAY) Paypal along with Amazon have created new ways to use credit in online commerce.
- The IRS now takes credit cards.
- McDonalds (MCD) as well as its competitors started to accept credit/debit cards.
- There is still large growth in debit cards ahead particularly for bank under-served and low credit consumers.
- Soda and vending machines accept credit/debit cards.
It goes on…Credit and debit card use has no place to go but up, here and around the world. These companies do pay dividends but they are low.
This selection surprises even me, but when I look at the facts, Apple (AAPL) is an obvious choice for dividend investors even though Apple pays no dividend, nor does it even buy back stock (another method that companies typically use to return value to shareholders)!
I remember when the first Apple MacInstosh computers first came out. If you have used one, you will note that the same quality detail, design and spirit is present in the new products. If you put them side by side, you will be able to easily see that the products are from the same company, even though they are 30 years apart!
What technology company can say that? Remember Windows 3.1 or Windows NT? Uhh, let’s forget those!
Apple has a developed a mind-share with its customers that very few companies can duplicate because they have committed to it over 30 years and have created products that very few other companies are able to duplicate. This mind-share is a larger economic moat then the company gets credit for.
And Apple is building out its ‘eco-system’ which will make it harder for competitors as time goes by. The Apple ‘eco-system’ ties in content (movies,books, etc), data (photos, tweets), across products and in the cloud.
As long as Apple continues to create products with beauty and technology molded as they have over the years, they should be able to prosper going forward.
Can a company be this boring but have such exceptional growth? Yes, it can. Fastenal (FAST) grew its earnings by 36% last quarter. Fastenel has the distinction of being the company with the highest return since the 1987 stock market crash: over 40,000%!
Unfortunately you may not have heard of Fastenal. They are a company with excellent management quietly creating value in an industry that is, shall we say, unsexy.
What do they do? Simply, they make nuts and bolts for everything. It would take years to read the spec sheets for all their products and lines, they have 100s of thousands of different bolts, nuts, fasteners across different product lines.
FAST has competitors but they are by far the biggest player in their space and have built a huge business that would be hard to duplicate. The next biggest competitor to Fastenal, W.W Grainer (GWW) is no slouch either but is much smaller. GWW has a 40 year track record of dividend increases and is a quality company in its own right worthy of your consideration.
Unfortunately, FAST has a very sexy P/E ratio of 42. This stock is twice as expensive as Apple! You need to be cautious when buying this stock.
Readers, do you have other ideas for growth plays that are easy picks?