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How Dividends Change the Game for UnitedHealth Stock

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The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Today we're looking at the newest addition to the Dow Jones Industrial Average (DJINDICES: ^DJI  ) . UnitedHealth Group (NYSE: UNH  ) currently offers a modest dividend yield of just 1.6%, which is far below the premium index's average yield of 2.6%. Only four of the other 29 Dow members offer yields lower than this stock's.

But the story changes quickly if you look at some other important metrics. No other Dow stock has kept up with UnitedHealth's dividend increases over the last decade -- or even come close.

UnitedHealth has boosted its payouts by an annual average of 62% over the last decade. The closest challenger on this crucial metric is McDonald's (NYSE: MCD  ) with a paltry 29% annual increase. Microsoft (NASDAQ: MSFT  ) comes next with a 28% compound average dividend boost.

It's not a completely apples-to-apples comparison, of course. UnitedHealth used to sport a token dividend of $0.03 per year. When the Obamacare act passed, UnitedHealth felt the need to reassure investors that everything would be all right, so it pumped up the payouts to $0.50 a year in one fell swoop.

McDonald's and Microsoft haven't seen any such incentive to juice up their payouts in recent memory, although Mr. Softy didn't pay dividends at all until 2003. Even so, UnitedHealth's massive one-time boost made a bigger difference than Redmond's decade of reliable but modest increases.

But the company has also shown solid commitment to strong increases, even after that single-shot jump. UnitedHealth's dividend has grown from $0.54 per share to $0.92 per share over the last two years, which works out to a 30.7% annualized boost. Yep, that's still faster than the Dow elite: McDonald's boosted payouts by just 12.5% a year over the same period, and Microsoft settled for 15%.

Moreover, UnitedHealth has more headroom for even juicier increases than most of its Dow peers. The company diverted just 17% of its trailing earnings into dividend checks. Microsoft's payout ratio sits at 34%, and McDonald's shells out 55%. In other words, I would be surprised if UnitedHealth put the brakes on its dividend growth before its closest growth rivals.

So UnitedHealth may not offer the Dow's richest yield today, but the stock certainly seems headed for strong dividend increases for the long term.

Obamacare will undoubtedly have far-reaching effects on health-care-related companies -- and especially insurers like UnitedHealth. The Motley Fool’s new free report, "Everything You Need to Know About Obamacare," lets you know how your health insurance, your taxes, and your portfolio could be impacted. Click here to read more. 

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Related Tickers

9/26/2016 4:35 PM
^DJI $18094.83 Down -166.62 -0.91%
MCD $116.53 Down -0.64 -0.55%
McDonald's CAPS Rating: ***
MSFT $56.90 Down -0.53 -0.92%
Microsoft CAPS Rating: ****
UNH $139.72 Down -0.79 -0.56%
UnitedHealth Group CAPS Rating: ****