Mastercard Inc.'s Dividend Could Double in Just 5 Years

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There are multiple good reasons to love dividend stocks, but one of the best reasons investors should want them in their portfolio is that some of them will see their annual dividend payments grow over the years.

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Credit card company Mastercard (NYSE: MA) is one company positioned to see strong dividend growth in the coming years. Indeed, based on a quick analysis of Mastercard's recent dividend hikes and its underlying financials, Mastercard's dividend could easily double in less than five years.

A look at Mastercard's dividend

Dividend Yield

3-Year Average Dividend Growth

Most Recent Increase

Payout Ratio

0.7%

26%

15.8%

21%

Mastercard's dividend yield of just 0.7% certainly isn't meaty. But don't bail on this dividend stock yet.

A look at the credit card company's 3-year average dividend growth and its most recent dividend hike both highlight Mastercard's affinity for dividend increases. Mastercard's dividend has increased at an impressive average rate of 26% annually over the past three years. And the company's most recent dividend increase of 15.8% was strong, too. Therefore, dividend investors who buy Mastercard stock today aren't just getting a 0.7% dividend yield. They're buying into a rapidly growing dividend.

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But can Mastercard continue increasing its dividend meaningfully in the years to come? Absolutely. A strong EPS growth trend -- 12% year-over-year growth in the trailing 12 months -- should help Mastercard continue increasing its dividends. Indeed, analysts expect strong EPS growth to continue for years, forecasting Mastercard's EPS to increase at a rate of 15.3% annually over the next five years.

But even if Mastercard's earnings growth failed to live up to analysts' rosy expectations, Mastercard is still in a good position to increase its dividend, as its dividend payments amount to just 21% of earnings and 22% of free cash flow.

How Mastercard's dividend could double

With both a strong trend of dividend growth and the underlying fundamentals to support sustainable dividend increases, it won't take long for Mastercard's dividend to double. Assuming Mastercard can continue increasing its dividend at a similar rate as its most recent 15.8% dividend increase, the company's dividend payments could double in under five years. After doubling, this would bring Mastercard's future dividend yield on today's cost basis to 1.4%.

While it's possible that Mastercard may not sustain dividend increases at similar rates in the coming years, it's also worth noting that the company could easily get more aggressive about increasing its dividend in the coming years, doubling its dividend even faster. For instance, if Mastercard increased its dividend at a rate on par with its 3-year average dividend growth rate of 26%, the credit card company's dividend would double in just three years. And investors shouldn't put it past Mastercard to do this. After all, Mastercard has approved some big dividend hikes in recent history, like when it was boosted by 45% in 2015.

Sure, investors who buy Mastercard won't get a nice dividend yield up front. But patient investors who buy this dividend stock today will likely be happy they did five years from now.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard. The Motley Fool has a disclosure policy.