A 1% dividend yield doesn't sound like much. And in many cases, it isn't. On a $10,000 investment, that's just $100 in dividends. It's not hard to find higher-yielding stocks. But by looking at just a current dividend yield, investors could be missing out on the bigger picture, including the dividend's growth potential and the gains the stock may generate for your portfolio over time.
UnitedHealth Group (UNH 0.27%) currently pays a yield of just 1.1%. And although that's below the S&P 500 average payout of approximately 1.4%, it's still a better income stock to own than many higher-yielding investments out there. Here's why the dividend is deceptively low and income investors should be careful not to overlook it.
The dividend has increased by 792% in 10 years
Today, UnitedHealth pays investors a quarterly dividend of $1.45. But 10 years ago, its payouts were just $0.1625 every three months. The company's dividend is nearly nine times what it was a decade ago. That averages out to a compound annual growth rate of more than 24%. That type of increase isn't one that investors should continually expect, but it's a sign of the company's commitment to raising its payouts and creating value for its shareholders.
Put another way, consider a $10,000 investment in UnitedHealth 10 years ago, when the stock was trading around $60 per share. Its dividend yield would still have been around 1%. Buying at that price would have enabled you to acquire approximately 167 shares of the company. Today, those shares would be generating dividend payments of about $242 every quarter and $968 annually. Your dividend income would now represent 9.7% of that original investment -- far more than if the company were to not increase its dividend and if you were to continue collecting just $0.1625 per share.
Plus, there are also the gains your stock would have achieved during those years.
UnitedHealth has made for a solid growth investment as well
Another factor investors shouldn't discount is a stock's ability to rise in value. Even if dividend income is your primary objective, oftentimes the largest profit you'll make is simply from a stock's appreciation over time. UnitedHealth has soundly trounced the S&P 500 over the past decade with gains of close to 800%. The stock's total returns (including dividends) would put your profits even higher, in excess of 930%:
Although investors may think UnitedHealth is just a boring healthcare company, that would be a big mistake. It has been evolving its business and is continually looking at ways to be more diverse and better serve its customers. One of its latest acquisitions, the purchase of in-home healthcare services company LHC Group, extends its services into patients' homes. And the cash-rich UnitedHealth, which generated around $20 billion in free cash flow last year, made the $5.4 billion purchase without having to dilute its shareholders.
Is UnitedHealth a buy today?
UnitedHealth remains a solid dividend stock to buy and hold. The key part is remembering to hold on to the stock and benefit from its generous payouts and inevitable increases in the dividend. Its payout ratio is only 32%, which suggests there's still plenty of room for more rate hikes in the future. Although the 1% yield may look low, investors need to look past that. The long-term value UnitedHealth's stock possesses is what makes it a promising buy, including for investors who are just starting out.