Walgreens Boots Alliance (WBA -1.33%) has an incredible track record for increasing its dividend payments. In 2022, it raised its payouts for the 47th straight year. For a company to do that, it needs to have solid, consistent financials, and strong enough profitability and cash flow to support those increases.
Although you should never assume that dividend increases are a certainty, it's hard not to expect that your dividend will increase when owning a stock like Walgreens -- its track record for dividend growth is a key reason why many people invest in it.
Here's a look at how much a $25,000 investment in Walgreens can generate in dividends today, and how much it might bring in for your portfolio in the future.
What dividend growth rate is reasonable to expect?
Assuming that Walgreens increases its dividend, the one question to consider is what kind of rate might be reasonable to expect. Starting with the company's most recent dividend payment in December, this is how much the pharmaceutical retailer's quarterly payment has grown by in the past:
Data source: Company filings. Chart by author.
Walgreens' most recent increase was just a modest 0.5% hike to the payout. It's possible that with the company seemingly going all in on healthcare and expanding into primary care, investors may see more modest increases in the future as its needs for cash tighten up. But it's too hard to tell, as that initiative is still in its early stages.
However, it is fair to say that the rate of dividend increases has been slowing down in recent years, and a 10% increase seems unlikely and unsustainable. At most, I would expect if things go well for Walgreens, it could increase its payouts at a rate of 5%, but that might be under a best-case scenario.
What the dividend income may look like in the future
Walgreens' dividend yield is 5.35% today, meaning that a $25,000 investment would allow you to collect approximately $1,338 in dividends over a full year. Here's what the dividend income may look like in the future if the company were to raise its dividend by a low (1%), medium (3%), or high (5%) amount per year:
Data source: Chart by author.
In the chart, you can see the different dividend income amounts by year by the different growth scenarios. The most likely scenario that I see is Walgreens increasing its dividend at a low amount for the foreseeable future.
There's simply too much on Walgreens' plate right now, with its healthcare expansion and possible competition from CVS Health (it's also looking at getting into primary care), for a best-case scenario to be a likely outcome. Walgreens probably won't increase its dividend at a high rate.
That may be discouraging, but a low rate of growth appears to be the most probable at this point. But the good news is that with a high yield of over 5% already, investors don't need a lot of growth to earn a good dividend -- the S&P 500 averages a yield of only 1.7%.
Should you buy Walgreens stock for its dividend?
I wouldn't suggest buying Walgreens stock solely for the high dividend. Over the past four quarters, the amount it has paid in dividends ($1.7 billion) is more than the free cash flow the business has generated ($1.4 billion).
The dividend should be a nice-to-have feature but not the sole focus for investors, especially since Walgreens is undertaking some lofty growth initiatives in expanding its healthcare business. If you're bullish on that venture and believe Walgreens will be successful, you'll likely also be bullish on its prospects of growing its dividend by healthy rates in the future. In that case, the stock is a buy.
If, however, you're not as convinced (as I am) that everything will turn out rosy for the business, it may make sense to step back and wait and see how the company's expansion into healthcare will turn out. The danger is that if it fails or doesn't go smoothly, Walgreens may have no choice but to bring the dividend rate hikes to a halt, or reduce them even further.
For those reasons, I'd suggest holding off on buying the healthcare stock right now.
