MasterCard Announces A Stock Split, But What Is The Real News?

Credit card giant MasterCard (MA) made news this week by announcing its plans to do a 10-for-1 stock split.

The news is noteworthy because stock splits have fallen out of favor lately. Google’s (GOOG) and Priceline’s (PCLN) share prices are now above $1,000, while Apple’s (AAPL) and Chipotle Mexican Grill (CMG) are both more than $500. And then of course, there is Warren Buffett’s Berkshire Hathaway (BRK.A), which trades for an almost ridiculous $172,627 per share.

In decades past, companies considered it worthwhile to keep their stock prices below $100 per share. This made the shares more affordable for retail investors and kept the trading volume high, making the shares more liquid. (Buffett, ever the contrarian, refused to split Berkshire’s shares specifically because he wanted to discourage overtrading and short-term speculation in the stock. Wise man, that Buffett.)

At any rate, while the MasterCard stock split is what attracted most of the headlines, its 83% dividend hike is what caught my eye. Its quarterly dividend will be $1.10 per share going forward, giving it a dividend yield of about 0.55%.

Now, with a yield of barely half a percent, MasterCard can’t exactly be called a “dividend stock.” But the growth in the payout is still impressive. Just this past February, MasterCard doubled its quarterly dividend, so today’s announcement means that the company will have raised its dividend by 267% over the course of a year. Not bad. And given that the payout ratio is still less than 18% of profits, more dividend hikes are likely to come.

I am a big believer in the economics of the electronic payments industry. For the past several years, I’ve argued that the shift from cash and checks to credit and debit cards is a major macro theme that happens to coincide with two other equally significant macro themes — the rise of online commerce and the rise of the emerging market consumer.

In fact, I won InvestorPlace’s Best Stocks of 2011 contest with my selection of rival Visa (V) based on these ideas (I’m also duking it out for first in the 2013 contest with my selection of Daimler (DDAIF) for the Best Stocks of 2013).

But as enthusiastic as I am about the underlying businesses, I wouldn’t touch the stocks right now. Visa and MasterCard are both a little too richly priced for my liking, trading for 27 times earnings and 31 times earnings, respectively.

I would, however, recommend you focus your investing around companies that, like MasterCard, have been consistently raising their dividends. There is no better way for management to send a message of stability and strength than by raising its cash dividend. Paper earnings can be massaged, but cash doesn’t lie.

And the payment of a dividend encourages managerial discipline and shows that management takes its shareholders seriously. And on a side note, any company that survived 2008 and 2009 with its dividend intact is a company that can survive the apocalypse.

Furthermore, if you are living off the income generated by your investments (or intend to), you need dividend growth to keep pace with inflation.

For a nice one-stop shop, I recommend you give the Vanguard Dividend Appreciation ETF (VIG) a look. VIG limits its portfolio to companies that have raised their dividend for a minimum of 10 consecutive years. VIG is a fine addition to any long-term portfolio, but you can also use its underlying holdings as a screener for further research.

Among my favorites: mass retailers Wal-Mart (WMT) and Target (TGT), and pipeline operator Oneok Inc (OKE).

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.