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Should You Trust This Top Health-Care Dividend?

Dan Carroll
August 28, 2013

The medical-device industry isn't probably the first place you'd think to find great, high-yielding dividend stocks. While other players in health care -- notably Big Pharma -- offer some truly great dividends, many medical-device stocks focus more on growth and innovative products. However, income investors can't ignore one of the industry's largest players, Medtronic (NYSE: MDT).

With a 2.1% dividend yield, Medtronic's not the biggest dividend stock on the block. But this company's the world's largest pure medical-device maker and one of the strongest players in health care. Should income investors add it to their portfolio?

The numbers line up
Medtronic's 2.1 yield might not sound like a lot, but it stands tall with some of the other major stocks in the health-care field. Abbott Labs (NYSE: ABT), which competes with Medtronic in the cardiovascular device space, sports only a 1.6% yield by comparison, despite being a strong pick for any income investor in its own right.

Like Abbott, Medtronic's also a member of the esteemed dividend aristocrats, or those companies that have raised their dividend every year for at least 25 years. Past performance may not be indicative of future results, but it's a testament to Medtronic's stability over the past that the company has stuck by income investors over more than two decades.

Medtronic also has plenty of flexibility to boost that modest yield in the future. The company's dividend payout ratio of just 31% -- right around the S&P 500 average at the end of last year -- is lower than many of the more prominent dividend stocks in health care. Abbott, by comparison, carries a 52% payout ratio. Unusually strong or weak earnings over the recent past can influence the payout ratio, but Medtronic's earnings have been steady over the past three years.

But the dividend itself isn't all there is to a strong dividend stock. Top picks for income investors also need to be steady and strong -- and that's where Medtronic's topping the charts among medical-device makers.

Growth and stability for the long run
Like many medical-device makers, Medtronic's toughed out pricing pressures and tough competition over the past few years, problems that have taken a toll on the company's top and bottom lines. However, Medtronic's lessened its reliance on slow-growth areas recently and focused on growing new businesses -- strategies that should play out well for the long term, especially for income investors concentrated on steady growth over the coming years.

The cardiac rhythm management industry, which includes pacemakers and other cardiovascular systems, has taken an especially damaging hit of late, but Medtronic's made the best of a bad situation. In 2011, Medtronic's cardiac disease rhythm management segment accounted for more than 32% of total sales. In the 2013 fiscal year, that number had fallen to below 30%.

Diversity makes some of the strongest health care companies -- such as the aforementioned Abbott -- and Medtronic's in no shortage of it. While defibrillator sales have fallen, Medtronic's grown sales of neuromodulation products, which gained 3% in the