1 Great Dividend You Can Buy Right Now: Discover Financial Services (DFS)

Partnerships are another key factor that propel financial service companies like Discover to success. If American Express’ deal with Wal-Mart sent shivers down Green Dot Corporation (NYSE:GDOT) and NetSpend Holdings Inc (NASDAQ:NTSP)‘ shareholders’ spines, then Discover’s partnership with eBay Inc (NASDAQ:EBAY)‘s PayPal should have put the entire sector on notice. In an escalating mobile payment battle with privately held Square, eBay landed Discover as a partner just two weeks after Square landed Starbucks Corporation (NASDAQ:SBUX). The move, as TechCrunch notes, allows Discover’s network of more than 7 million domestic merchants to accept PayPal as a form of payment. This doesn’t even count the number of merchants that could eventually accept PayPal internationally.

A dividend juggernaut in the making
Perhaps the most exciting factor about Discover is its potential for future dividend growth. I admit, a 1.4% yield doesn’t exactly turn heads now, but Discover’s payout has been growing rapidly and is just a fraction of its annual profit meaning it is likely to head higher as the company turns its attention to paying out its excess capital to shareholders:


Source: Dividata, *Assumes $0.14 quarterly payout for 2013.

As you can see above, Discover’s quarterly payout has jumped sixfold, from $0.02 to $0.14, in just the past two years. Based on Discover’s new payout of $0.14, it’s on pace to pay out just 12.8% of projected 2013 earnings, leaving plenty of room for a sustained payout and lots of future growth.

Foolish roundup
Credit service processors and lenders are in the midst of a huge growth opportunity with record-low domestic interest rates spurring spending and prepaid debit card growth surging. Internationally, untapped emerging markets offer a seemingly limitless opportunity for processors like Discover. Because the size of the global credit market is expanding so rapidly, all processors and lenders can grow without fear of losing significant (if any) market share to their rivals. As one of the premier credit processors and with charge-offs at historic lows, it seems only natural to expect further dividend hikes and continued outperformance from Discover moving forward.

The article 1 Great Dividend You Can Buy Right Now originally appeared on Fool.com and is written by Sean Williams.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of MasterCard, eBay, and Starbucks. Motley Fool newsletter services have recommended buying shares of Visa, American Express, eBay, and Starbucks.

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