Why settle for an average dividend stock when you can hold a great one in your portfolio? A great dividend stock provides investors with a better yield than what they could typically earn from the average S&P 500 stock, has a solid track record of raising its payouts, and produces a sustainable dividend.
Today, I'll look at whether medical distribution company Cardinal Health (CAH 1.63%) falls into the category of a great dividend stock and whether it belongs in your dividend empire.
Cardinal currently pays a dividend yield of 3.7%
Investors who hold shares of Cardinal currently receive quarterly payments of $0.4859. That equates to an annual payout of $1.9436 per share, for a dividend yield of about 3.7% -- which is well above the 2% the typical S&P 500 stock pays.
A good dividend yield is important; otherwise, it may not be worth an investor's time to even consider an income-generating stock like Cardinal Health. On a $10,000 investment, the difference between a stock paying 2% and 3.7% is $170 per year in dividend income.
The current payout is important, but long-term investors will also want to see their payouts grow over time, which is why a dividend stock can't be great if it doesn't increase its dividend payments.
The stock's been increasing its payouts for decades
Cardinal's been hiking its dividend payments for more than 30 years in a row, making it a Dividend Aristocrat. The Ohio-based company has raised its payouts even amid the pandemic. Its latest increase came back in May, when Cardinal announced it would now be paying a quarterly dividend of $0.4859 -- a 1% increase from the $0.4811 that it paid previously.
Five years ago, Cardinal was paying $0.387 every quarter. Since then, the company has increased its dividend payments by 26%. That averages out to a compound annual growth rate (CAGR) of 4.7% per year. The latest increase of 1% shows that the company has slowed down recently, which is not all that surprising given how long it's been raising its payouts and the uncertainty that lies ahead for the economy.
A more important question, especially amid a pandemic and a recession, is whether Cardinal can continue paying (and increasing) its dividend payments.
Is the dividend safe?
There are a couple of ways to assess the safety of a payout. One is to look at the company's cash flow; the other is to consider its dividend payments in relation to profits.
Over the past four quarters, Cardinal's net income is in the red, because in its first-quarter results of fiscal 2020, which the company released in November, it accrued a $5.6 billion charge related to opioid lawsuits. It's a nonrecurring expense that has skewed the company's recent results.
But investors can adjust for that by looking at the company's two most recent quarters, during which Cardinal's diluted earnings per share (EPS) totaled $1.94. Extrapolating that over a full year would result in an EPS of $3.88. That's well above the company's annual dividend payments of $1.9436 and comes out to a payout ratio of 50%. The one caveat, however, is that this payout ratio assumes Cardinal's financials aren't weighed down by more lawsuits, which at this point is difficult to predict.
A quick look at the company's statement of cash flow also shows that Cardinal's in good shape from a cash perspective to handle its current dividend payments. Aside from Q1, the company's free cash flow has come in well above the cash dividends that Cardinal's paid out to shareholders over the past two years.
Not only is the current dividend safe, but there's definitely room for the company to continue raising its dividend payments in the future.
Cardinal Health ticks off all the boxes and is a great dividend stock to buy today
The healthcare stock definitely falls into the category of being a great dividend stock. Not only do the company's payouts look strong, but so does the business itself. In each of its past 10 quarters, Cardinal has reported an operating profit (which comes before net income and nonoperating expenses like litigation), and its top line hasn't fallen below $33 billion.
The company's even been doing well amid the pandemic. When Cardinal released its third-quarter results on May 11, sales were up 11% year over year, as the company believes consumers were stocking up on pharmaceuticals due to COVID-19.
Year to date, the stock's up 2% thus far, which is impressive given the S&P 500 is down around 4% over the same period. Whether you're an income investor or just looking for a safe stock to hold in your portfolio, Cardinal Health looks to be a great buy today.