Now That's What I Call a Healthy Dividend Increase

UnitedHealth Group (NYSE: UNH) increased its dividend more than 16 fold yesterday going from a token $0.03 once a year, to $0.50 split over four payments per year. The new yield isn't at the level of some stellar dividend plays , but the increase should help woo some investors that might be a little nervous about the health of the industry after health-care reform legislation passed earlier this year.

It might also put a little pressure on the rest of the industry that's been rather stingy about handing its cash back to investors.

Source: Yahoo! Finance.

While the dividend hike may attract some investors, it could have the opposite effect for its customers. Fools realize the company is making the same profit and free cash flow no matter what its dividend is, but the average customer may hear about an increased dividend and assume it means the company is making more. Fortunately it's often the employer of the end user that makes the decision to buy, and they're more likely to be focused on cost, and less worried about how much UnitedHealth is making.

Returning money to investors may be the best use of UnitedHealth's cash. The company had previously used the cash it generated to grow externally through acquisitions, but further consolidation in the insurance industry is likely to be frowned upon. Justified or not, areas with just a few insurers -- and therefore a lack of competition -- were the poster-child for high health-care costs during the reform movement.

And besides it's not like UnitedHealth is giving up all its cash flow; the current dividend is only expected to take up 12% to 13% of UnitedHealth's cash flow. That will still leave plenty of money to repurchase shares or expand externally, potentially in its Health Services businesses, which is in the business of lowering health-care costs -- a popular notion these days.

Nick Kapur says cash is good, but giving it to shareholders is even better.