A common misconception for beginner investors is that choosing growth stocks isn't always required to generate lucrative portfolio gains. Many times, the best-performing stocks are blue chip businesses the grow sales and profits steadily and consistently over a long period of time. In turn, these companies may reward shareholders in the form of a dividend (free money!).
This approach to portfolio management has been perfected by Warren Buffett. His Berkshire Hathaway portfolio owns very few smaller growth stocks; rather, Buffett is known for taking positions in industry-leading brands that sport strong cash flow and dividend payments.
One Buffett stock that I think looks particularly tempting right now is credit card company Visa (V -0.19%). Below, I'll explore why I see Visa as a solid choice for passive income and assess how owning the stock for decades could prove to be a wise move.
Great news for Visa shareholders
On Oct. 29, Visa reported financial and operating results for its fiscal fourth quarter and full year 2024. One of the highlights of the report was that Visa's board of directors approved a 13% increase to the company's quarterly dividend, bringing it to $0.59 per share.
As the chart below shows, Visa has steadily risen its dividend since the company's initial public offering (IPO) in 2008.
V Dividend data by YCharts
The importance of dividend stocks in your portfolio
Investors hold onto dividend stocks for different reasons. For retirees, dividend income can be a good source of cash and help prevent dipping into your savings for unnecessary reasons.
However, younger demographics may want to augment their stocks stocks with reliable dividend players as well.
The chart above shows how Visa stock has performed since its IPO both on a standalone and total return basis. The big difference between these two lines is that the total return includes re-investing dividend income into Visa stock as opposed to receiving the payment as cash. As you can see, reinvesting dividends has added significant appreciation to Visa's long-run return.
Unlike retirees, younger investors may not need to supplement their cash savings each month or quarter. But as the themes explore in the chart make clear, reinvesting dividend income into your stock portfolio can bolster your gains in a material way.
Below, I'll get into why I see Visa as a reliable source of dividend income and explain what long-term investors should keep an eye on.
Image Source: The Motley Fool
Why I think Visa is a safe dividend opportunity
An important thing for dividend investors to consider is whether or not these payments are sustainable. In other words, does the company in question have the financial wherewithal to not only maintain paying a dividend, but hopefully raise it?
Some good metrics to help determine the answer to the question above is looking at free cash flow and the payout ratio. I like analyzing free cash flow because it measures a company's excess profits after capital expenditures (capex), making it potentially more useful and accurate assessment of profitability compared to net income. Moreover, the payout ratio helps investors get an idea of how much of a company's earnings is being returned to shareholders in the form of a dividend.
V Free Cash Flow (Quarterly) data by YCharts
For Visa, it's important for the company to balance shareholder rewards while maintaining adequate liquidity to invest in product development, cybersecurity protocols, and expansion efforts such as acquisitions -- all important areas for the highly intensive credit card payments industry.
As the chart above shows, Visa has done a stellar job of generating free cash flow growth over a long-term horizon. Moreover, the company has used these profits to raise its dividend.
Indeed, these trends suggest that Visa has room to continue investing in growth opportunities while maintaining (and likely raising) its dividend even further in the long-run. To me, Visa stock is a no-brainer for investors looking for growth and passive income -- a pretty rare combination. I think right now is a great opportunity to scoop up shares of Visa stock and prepare to hold on for decades to come, just as Buffett often encourages investors to do.
