Healthcare giant Johnson & Johnson (JNJ -0.72%) recently announced it was raising its payouts for a 60th straight year. That's an impressive streak for the Dividend King; to join that club, a stock needs to hit 50 years of dividend increases.
Stocks that increase their dividend payments consistently are a rarity in the stock market. Ones that do so for decades are even more uncommon. What's also rare is a stock that boosts its payouts every quarter. That's what Healthcare Services Group (HCSG -1.51%) has been doing. And its streak is incredibly impressive, now sitting at 75 straight rate hikes.
But does that necessarily make it a good investment now. Let's take a closer look.
Increasing its dividend since 2003
Even though Healthcare Services isn't a stock that falls into the category of Dividend Aristocrats -- companies that have increased payouts for 25 years in a row -- that doesn't mean it hasn't been one heck of a dividend growth stock over the past couple of decades. On April 20, the company, which provides housekeeping and dining services to healthcare facilities, announced its latest quarterly results alongside another hike to its dividend.
Its current dividend is now $0.2125 per share, just a smidgen higher than the $0.21125 that it paid out last quarter. But investors also shouldn't expect large increases when a company is making them every quarter; otherwise, its dividend growth could quickly become unsustainable.
On a year-over-year basis, the dividend is 2.4% higher than the $0.2075 that Healthcare Services was paying its shareholders a year ago. That's more in line with what investors might expect from a company with a long streak of dividend increases. The shares currently yield 5%, more than three times the S&P 500 average of less than 1.4%.
But is the payout safe?
The healthcare company is likely to hike its dividend again, but it's also worth asking: is the payout safe? Right now, it's well above the $0.15 diluted per-share profit that Healthcare Services reported for the first three months of 2022, putting its payout ratio at more than 140%. Why is this?
That's because the company's cost of services -- which makes up the bulk of its expenses at more than 87% of revenue -- has been higher of late due to rising labor and supply costs. Healthcare Services is working to bring that percentage down to its historical target of 86%, which would improve margins and bring down that concerning payout ratio.
Is this a dividend stock to consider?
Despite its high payout ratio, Healthcare Services has an impressive streak, which survived both the Great Recession and the COVID-19 pandemic so far -- and it doesn't look to be in danger just yet. The company intends to keep the payout growing, which is why I don't see it ending unless something dire happens.
Plus, with the business still looking to shed costs, I'm inclined to believe that a dividend cut would be a last resort. This is part of the appeal of investing in dividend stocks with long track records -- there's an incentive for the business to keep the streak going. However, that doesn't mean the payout is guaranteed to continue. Healthcare Services has reported negative free cash flow of $3 million over the trailing 12 months, suggesting that it isn't generating enough money to pay its dividend.
Plus, the business has struggled to grow, with sales sliding more than 18% over the past three years. That's likely a key reason behind the stock's mammoth 69% decline since 2018. The worst-case scenario for investors is that Healthcare Services struggles and isn't able to trim enough costs from its operations and it has to stop raising its dividend, potentially even cutting it.
Given that uncertainty and with inflation still weighing on businesses, I wouldn't be overly optimistic about Healthcare Services being able to continue its streak of dividend increases for a whole lot longer. Dividend investors are better off going with safer dividend stocks that yield nearly as much as Healthcare Services.