Eli Lilly (LLY 0.11%) is a top growth stock to own. The business is worth $560 billion, and that valuation is likely to get bigger in the years ahead. You might be tempted to buy the stock for the company's well-diversified product portfolio or perhaps for Zepbound, a weight-loss treatment that regulators recently approved, which could generate tens of billions in revenue.
Those are all solid reasons to invest in the company, but there's also one you may not have considered: its dividend. Although Eli Lilly's payout doesn't look like anything to get excited about (it currently yields less than 1%), that's deceptively low. The yield is another great reason to consider holding the stock in your portfolio.
Here's why you shouldn't discount Eli Lilly as a top dividend stock.
NYSE: LLY
Key Data Points
Lilly has aggressively raised its dividend for years
Eli Lilly has been paying dividends for well over a century. In fact, its first dividend dates back to 1885. Over the years the pharmaceutical giant has also increased its dividend payments. But what's encouraging is that the company isn't going to raise them by a few cents just so it can keep a streak going and say it's a Dividend King.
In the mid-2000s, Eli Lilly's dividend growth streak hit 40 straight years. Ultimately, due to the financial crisis of 2008-2009, the company ended its streak. It could have borrowed from the playbook of other dividend growth stocks and gone to more decimal places for the sake of saying it was increasing the dividend, without really making any significant change to the payout. Instead, it wasn't afraid to break its impressive streak by leaving its dividend unchanged.
In 2015, Lilly went back to raising its dividend payments. And as its financial results have gotten stronger, its dividend has increased by larger amounts as well. This year, the quarterly dividend of $1.13 is 15% higher than the $0.98 shareholders received last year. The chart below helps illustrate just how Eli Lilly's dividend increases started out small years ago and have gotten larger over time (note the big jump this past year):
LLY Dividend data by YCharts.
As a dividend investor, I'd prefer to see large increases rather than $0.01 bump-ups just for the sake of continuing a streak. Eli Lilly's practical approach to dividend increases is just one of the reasons why this is an underrated dividend stock to own.
More dividend hikes could be coming
If you're bullish on Zepbound and the game-changing effect it may have on Eli Lilly's business, you should also be excited for the dividend hikes which could follow. In the chart above, it's evident that Lilly has been willing to make significant increases to the dividend. And with the company's top and bottom lines potentially soaring in the future because Zepbound could generate tens of billions of dollars in revenue at its peak, there's likely to be a significant corresponding increase in the bottom line.
Today, the stock's payout ratio sits at around 80%; that suggests the dividend is manageable. But without factoring in the huge growth potential from Zepbound, I'd expect the rate of increases to slow down. However, given the significant profit and revenue growth Zepbound may generate for Eli Lilly in the long run, there could soon be a lot more room for the company to raise its payouts further.
A modest yield because of a soaring stock
Eli Lilly's current dividend yield of 0.8% doesn't look impressive when compared to the S&P 500, which is averaging a yield of 1.6%. But Lilly's yield is a victim of the stock's own success: Over the past three years, shares have quadrupled in value.
Suppose, for instance, that the stock was still trading at around $150, as it was back in November 2020. At that price, the current dividend would yield more than 3%. Lilly's stock would arguably be more attractive to dividend investors, and it would get picked up by more of the screeners that investors use to look for high-yielding stocks.
It's not that Eli Lilly pays a low dividend -- it's that the stock's impressive growth over the past few years has outpaced the increases to the payout, which haven't been modest.
A great buy for both growth and dividend investors
Eli Lilly is one of the best healthcare stocks for investors to buy today; there's a compelling argument for growth investors just as there is for dividend investors.
While the dividend yield may turn off some investors, a closer look at the business illustrates how this can be a fantastic investment in the long run. Your dividend income may be modest to start with, but over time, as the business gets bigger and as earnings rise, the company is likely to hike payments generously as it has in the past, leading to greater dividend income in the years ahead.
Between the underrated dividend and the promising growth prospects of the business, Eli Lilly is a no-brainer buy. It looks like an excellent investment that's suitable for any portfolio.
