The S&P 500 index dropped into a bear market last year as red-hot inflation and rising interest rates spooked investors. Unfortunately, the benchmark index is still down 18%, and the headwinds that orchestrated its collapse are still a problem. Inflation remains elevated, and the Federal Reserve signaled that additional interest rate hikes on the horizon.
On the bright side, economic headwinds are a temporary problem, meaning they should have no lasting impact on otherwise healthy businesses. Moreover, every past bear market ended in a new bull market, and investors have no reason to expect a different outcome this time. Put another way, the S&P 500 (and many of its constituent parts) will eventually recoup any losses and reach new highs.
In the meantime, investors can buy these dividend-paying growth stocks at a discount.
1. Mastercard
Mastercard's (MA 0.07%) quarterly payout of $0.57 per share represents a meager dividend yield of 0.64%, but the stock has produced a total return of 111% over the last five years, easily outpacing the 61% return of the broader market. Investors have good reason to believe that trend will continue.
Mastercard operates one of the largest payments networks in the world, and that scale creates a virtually unassailable moat around its business. That is true for two reasons. First, scale is the foundation of a powerful network effect. Mastercard is accepted at more than 80 million merchant locations, which puts it on par with Visa as the most accepted payment card. That ubiquity among merchants makes it popular with consumers, and its popularity with consumers reinforces its ubiquity among merchants.
Second, scale is the source of a significant cost advantage. Processing payments is highly scalable; Mastercard incurs virtually no cost for each incremental transaction, meaning it has higher margins (and could easily undercut the pricing) of any small competitor.
Mastercard delivered solid financial results in the fourth quarter despite operating in a difficult economic environment. Revenue increased 12% to $5.8 billion and GAAP earnings rose 9% to $2.62 per diluted share. But Mastercard has hardly scratched the surface of its addressable market, and its growth could accelerate as consumer spending rebounds and unfavorable foreign exchange rates normalize.
Mastercard reported $8.2 trillion in gross dollar volume over the past year, which represents a fraction of its $115 trillion addressable market. But digital payments are taking root around the world, and Mastercard is perfectly positioned to benefit given its scale and brand authority.
With that in mind, shares currently trade at 15.3 times sales, a discount to the five-year average of 18.1 times sales. That's why this dividend stock is worth buying.
2. Intuit
Intuit's (INTU 1.62%) quarterly payout currently sits at $0.78 per share, representing a relatively small dividend yield of 0.76%, but patient investors have still been well compensated over the long term. Intuit stock generated a total return of 145% over the last five years, more than doubling the return of the S&P 500, and investors have good reason to believe that outperformance will continue.
Intuit offers financial software and services to businesses and consumers. The company is best known for its tax preparation software (TurboTax) and its accounting software (QuickBooks), both of which are market-leading products in the U.S. But Intuit is working to deepen its customer relationships with adjacent solutions.
For instance, the company offers payroll, payment processing, and marketing software to small businesses with its QuickBooks platform, and it connects consumers with loans, insurance, and credit cards through Credit Karma. Intuit also offers live versions of its tax preparation software (TurboTax Live) and accounting software (QuickBooks Live), which allow users to instantly connect with financial professionals.
That strategy continued to pay off in the second quarter of fiscal 2023 (ended Jan. 31). Revenue increased 14% to $3 billion, driven by strong growth in QuickBooks and adjacent solutions, and non-GAAP net income climbed 42% to $2.20 per diluted share. Those results are particularly impressive because Credit Karma revenue dropped 16% due to headwinds across multiple lending verticals (e.g., personal loans, home loans, auto loans) brought on by rising interest rates.
Looking ahead, Intuit should be able to maintain that momentum for many years, especially in a more favorable economic environment. The company estimates its core addressable market (i.e., tax preparation and accounting software) at $81 billion, and it has room to grow in both categories. TurboTax and QuickBooks have achieved market penetration of just 39% and 13%, respectively, as measured by potential customers.
However, Intuit sees an even larger opportunity surrounding the adjacent solutions discussed earlier. The company estimates its total addressable market in the U.S. at $253 billion, and given the brand authority behind QuickBooks, it is particularly well positioned to upsell small businesses with tools for payroll, payment processing, and marketing.
On that note, shares currently trade at 9 times sales, a discount to the five-year average of 11 times sales. That's why this growth stock is worth buying today.
