Is Visa the Best Dividend Stock for You?

Visa (NYSE: V) is one of the largest transaction processors in the world, with its brand practically synonymous with the cards (credit and otherwise) that bear its logo. It has a long history of growth behind it and its strong industry position suggests it can continue to increase its dividend for years to come. But is it the best dividend stock? Well, that depends.

Dividend yield investors won't like Visa

To get the biggest problem with Visa as a dividend stock out of the way right up front, the dividend yield is a paltry 0.8% or so. That's even lower than the 1.3% you could receive from an S&P 500 index fund. If your goal is to live off of the dividends you collect from your portfolio, well, Visa is probably not going to be a great choice for you.

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But it might help to add some additional context here. If an investor were to put $25,000 into Visa today, the annual income generated would only amount to around $200 a year. The same investment in an S&P 500 ETF would provide about $325 a year. If you invested in a high-yield index fund such as SPDR Portfolio S&P 500 High Dividend ETF , which has a 4.32% yield, you'd collect $1,080. Those are big differences, and it should be pretty clear that investors in search of income will not be happy with Visa.

Dividend growth is Visa's strength

While dividend yield isn't exactly Visa's most attractive attribute, it has rewarded investors with pretty strong dividend growth. Over the past decade, the dividend has increased by roughly 18% a year. That's not a fluke driven by one big dividend boost, either. Over the trailing three- and five-year periods, the dividend has grown at compound annual rates of nearly 17% and 16%, respectively.

But rapid dividend growth can have a huge impact on the cash you generate from your portfolio. For example, if you bought Visa stock near its highest point in 2018 when it started paying a dividend, you would have paid around $22 per share. The dividend at that time was just $0.0263 per share per quarter for a yield of roughly 0.5%. At the current dividend rate of $0.52 per share per quarter, the yield on purchase price today would be a huge 9.4%.

V data by YCharts

And then you have to consider the increase in the share price, with the stock currently trading hands at over $260. So not only did dividend growth investors benefit from a quick increase in the payout, but there was immense capital appreciation, too. Dividend growth and growth-and-income investors would probably find Visa appealing.

Value investors might be a little worried

That said, investors need to understand that dividend growth stocks are often afforded premium valuations. On that front, Visa's price-to-earnings ratio (P/E) is a fairly lofty 29. What's interesting here is that figure is lower than the five-year average P/E ratio of around 35.

V PE Ratio data by YCharts

This creates a bit of a conundrum. Visa is far from an inexpensive stock, but it is cheaper than it has been in recent years. So a true value investor probably wouldn't find it attractive right now, though someone willing to look at value relative to history might. Notably, the stock's dividend yield is at the high end of the historical yield range, which suggests a relatively attractive price as well. If you are a dividend growth investor, that might be enough to draw you into the stock even though it is far from cheap on an absolute basis.

So is Visa the best dividend stock for you?

Whether Visa is a good dividend stock for your portfolio is going to depend on a number of factors. If you are looking to maximize the passive income you generate today or have a value bias, Visa will probably be a bad fit. But if you are a growth-and-income investor or a dividend growth investor, Visa might actually be a good choice given its historically high yield and a P/E that's lower than its five-year average.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Visa. The Motley Fool has a disclosure policy .