It’s been a while since I’ve made any purchases 1 in the dividend stock portfolio I’m building in my Roth IRA. The last new position I took in a stock was in First Niagara Financial Group. So far I’m losing on that purchase, but I still feel strongly about the company’s long-term prospects and have used some of the larger dips in price to add more shares.
However this post is about my most recent addition to the portfolio: American Express (NYSE: AXP).
Overall I’m pretty bullish on the credit card industry as a whole. Regardless of what I, or any other bloggers my write, Americans are still extremely dependent on credit cards. While the recession did get more people using credit wisely, as the economy recovers credit card use is sure to increase even more.
What drew me to American Express over its competitors in the credit card industry was its tougher screening processes. It’s much harder to get an American Express card than it is to get a card from, say, Capital One. This is because American Express holds a higher standard for credit worthiness of their customers. The benefit of this is that American Express sees a delinquency rate of just over 1%. While its competitors such as JP Morgan Chase and Capital One have delinquency rates closer to 3%. As long as Amex maintains higher standard than the rest of the industry it should help the company to perform better through tough economies than its competition.
Of course, as I’m trying to build a portfolio for dividend growth and income I would be amiss if the dividend of American Express didn’t factor into my reasons for buying it.
At first glance American Express doesn’t appear to have a very noteworthy dividend. 2 But the key to finding good dividend stocks is looking past their current yield and finding stocks with excellent dividend growth prospects. Before the financial crisis hit American Express had a good history of increasing their dividend payout each year. Currently the company only pays out 13% of its earnings in the form of the dividend 3. So there is plenty of room for future dividend growth.
Lastly, the acceptance network for American Express is still growing. While it is still not as widely accepted as Visa or MasterCard. Merchants that don’t accept American Express are a dwindling few. I believe growing acceptance rates in the U.S. along with the growth potential in international markets will fuel American Express’ earnings growth in the years ahead, allowing them to resume their prior trend of dividend growth. Both of which will benefit me and make for happy portfolio updates each month!