Recurring dividend income can be a great way to help pay your bills and bolster your savings. And while high-yielding stocks are great, you don't always need to avoid stocks with payouts that are currently lower; if those payouts grow over time, they could earn you a lot more in the future. Of course, in other cases, an ultra-low yield is just not attractive, even at a high rate of growth.
Thermo Fisher Scientific (TMO 0.66%), which has raised its dividend in recent years, isn't worth your time if your priority is dividend income. While the scientific products company itself is solid and could make for a great long-term investment, from a dividend standpoint, there are much better options out there.
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A look at the company's track record
Thermo Fisher currently pays its shareholders a quarterly dividend of $0.26, which yields just 0.19%. That's nowhere near even the S&P 500 average of about 1.3%. If you were to invest $100,000 into Thermo Fisher stock, you would earn just $190 from it on annual basis. Meanwhile, if you were to invest that amount into an average S&P stock, you could be earning about $1,300 -- nearly seven times that amount.
To its credit, however, Thermo Fisher has been raising its dividend payments over the years, meaning that $190 could grow over time. Certainly, given its payout ratio of just 4%, Thermo Fisher clearly has lots of room to raise its dividend payments. Its free cash flow of $8.1 billion over the past 12 months is well in excess of the $364 million the company paid out in dividends during that time.
However, the company doesn't have a strong track record for raising dividends and has only been doing so consistently for the past few years. From the $0.15 that it was paying in early 2018, it has hiked its payouts by 73%, with the most recent increase in December bringing an 18% boost from $0.22 to $0.26.
If the company were to make those generous 18% rate hikes the norm for the next five years, its quarterly dividend would end up at $0.59. That means if you were to buy the stock today, you could be earning 0.43% in dividends based on your original investment (i.e., your dividend income per year would be closer to $430). That's still nowhere near the S&P 500 average. Another healthcare stock, biopharmaceutical company Gilead Sciences (GILD 0.28%), pays around 4%, and even if it made no further increases to its payouts, it could still be a better dividend stock to own.
How it compares to Gilead over the long haul
Even if Thermo Fisher were to do the unthinkable and increase its dividend every year at a rate of 18% while Gilead Sciences didn't raise its payouts at all, it would still take nearly two decades for the dividend to be as high-yielding.
Gilead actually has been making increases to its dividend payments in recent years, but the point here is that even if it stopped doing so, it would likely take quite a long time for Thermo Fisher to catch up. And this still doesn't factor in all the dividend income you will likely miss out on from holding the lower-yielding stock during those years.
This doesn't mean Thermo Fisher is a bad investment
A company like Thermo Fisher that is always looking for ways to grow may simply not want to tie up its money with a dividend payout. The business has done a great job of growing over the years, with revenue of $32 billion in 2020 rising by more than 76% since 2016's $18 billion. Acquisitions have played a key role in that growth, so it's understandable that the company wants to keep its cash balance strong. Earlier this year, it announced a $17 billion acquisition of contract researcher PPD.
For growth investors, Thermo Fisher is arguably a better buy than a stock like Gilead despite the lower dividend yield. Over the past five years, its shares have soared more than 250%, far above the S&P 500's returns of 103%; Gilead's stock is nowhere close, declining by more than 10% during that time frame. Ultimately, it depends on your priority. If your focus is on dividends, then a higher-yielding stock like Gilead is a better option than Thermo Fisher. But if that isn't the case, then Thermo Fisher may still be the better buy.
