Given the market's sharp rise this year, with the S&P 500 and Nasdaq Composite rising about 15% and 14%, respectively, as of this writing, it's getting increasingly difficult to find good stocks to buy and hold for the long term. Many stocks' valuations have just become too pricey.
One way for investors to navigate a market like this is to turn to high-quality companies paying out dividends likely to grow over the long haul. Not only does each dividend payment take some risk off the table for the investor by paying out cash to shareholders, but companies with strong dividend prospects are typically also profitable and resilient -- increasing their odds of providing shareholder returns through share price appreciation over the long haul.
One dividend stock that meets these high standards is American Express (AXP -0.97%). This robust business demonstrates its consistent earnings power and fundamental strength through both a growing bottom line and dividend.
Strong earnings growth
In a macroeconomic environment many management teams are calling "challenging," you wouldn't guess it by looking at American Express' recent financial performance. Second-quarter revenue rose 8% year over year (9% when adjusted for currency fluctuations). Even more impressive, however, was the company's significant earnings per share (EPS) growth. The integrated payments company's EPS soared 44% year over year.
The company's unique business model is exceptionally good at producing earnings in almost any market. For instance, when cardmember spending growth decelerates as economic conditions become more challenging, American Express' rewards expenses also come down, bolstering profitability. Further, when consumer budgets get tight, loan balances increase and thus interest income grows. Additionally, its high-spending cardmembers are more resilient than the average cardholder at its competitors, rewarding American Express with delinquency rates that are the envy of the industry.
Of course, this business model is backed by American Express' secret sauce -- its rapidly growing fee revenue. Many of the company's most popular cards have very high annual fees, enabling it to provide a membership-like experience for its customers. Indeed, the company calls its cardholders "card members."
Since its members love the experiences they get in return for paying high fees, this model is working very well. Net card fee revenue in Q2 increased 16% year over year. This comes primarily from new customer acquisition, where 70% of new accounts are premium fee-based products, management said in the company's second-quarter earnings call.
Impressive dividend history
This powerful business model is translating into impressive growth in the company's quarterly dividend. Earlier this year, management increased the payout to $0.70, up more than 8% from what it was paying previously. On an annual basis, American Express' dividend payments now add up to $2.80, giving the stock a dividend yield of 1.1%. Growth in the dividend is particularly impressive when you zoom out three years. Today's quarterly payment is up 63% during this period.
Looking ahead, American Express will likely continue increasing its dividend, supported by both a low payout ratio (the amount of annualized earnings the company is paying out in dividends) of 19% and robust earnings growth. Further, strong business fundamentals combined with the stock's conservative valuation of 19 times earnings make the stock look attractive at today's price. Considering this earnings momentum and compelling valuation, perhaps investors who buy shares today will benefit from strong share price appreciation over the long haul.
Of course, American Express (and its stock) could suffer if a recession ensues. With much of its cardmember spending being in discretionary categories, the pullback in spending could be significant during tough economic times. But for the investors willing to hold shares through the other side of a recession and a subsequent recovery, the overall risk-reward profile of American Express stock looks quite attractive today.
