There are many reasons to invest in dividend stocks. Companies that offer regular payouts tend to have strong underlying operations and generate consistent revenue and profits, making them excellent choices in an uncertain market. However, just any dividend stock won't do. Some are far more attractive than others.
The very best are often worth investing in and holding onto for a long time. One great example is Zoetis (ZTS -0.96%), the leader in the animal health industry. Read on to find out why this dividend stock is a great forever pick.
Zoetis can overcome recent challenges
Zoetis has lagged broader equities this year. While market volatility probably didn't help, the company is facing its own issues. Zoetis' recent financial results and guidance fell short of market expectations.
One reason for this is that Zoetis expects one of its main growth drivers, Apoquel, a medicine used to treat allergic itch in dogs, to lose some market share due to the introduction of newer products. Most notably, one of Zoetis' main competitors, Elanco Animal Health, earned approval for a competing therapy called Zenrelia late last year.
Image source: Getty Images.
That said, competition is nothing new to Zoetis. While Zenrelia may disrupt its growth in the near term, the company has demonstrated that, over the long run, it can outperform most of its peers. Zoetis routinely grows its revenue and earnings faster than the industry averages, for instance. It also remains the leader -- or one of the leaders -- in many of its categories, from its work in companion animals to cattle and fish.
Maintaining a leading market share for years across all these segments is no easy feat, and it reflects Zoetis' ability to develop and market newer and better products, even when it occasionally faces competition that eats into its market share. It's also worth noting that, in this specific case, Zoetis still has a substantial addressable opportunity with Apoquel. The company noted that the market for treating allergic itch in dogs is expected to expand at a compound annual growth rate of 11% through 2028, as there are still 20 million dogs that are untreated or under-treated.
Further, several of the company's other newer launches should help pick up the slack. These include Librela, which targets osteoarthritis (OA) pain in dogs; and Solensia, which treats OA pain in cats. So, Zoetis should be fine after a period of adapting to this new market entrant.
Zoetis' attractive long-term prospects
Zoetis should benefit from several critical long-term tailwinds. First, the pet population has been increasing for years, and this trend is expected to continue. While that's going on, people in the U.S. and many other Western developed nations are having fewer children. Owners often treat their pets like children and are not shy about spending the necessary amounts on whatever they need to care for them, including medicine. That's right up Zoetis' alley.
The company's companion animal segment is its largest and its biggest growth driver. The animal health specialist also points out that there are demographic differences, with younger generations (millennials and Gen Z) leading the humanization of pets. These dynamics will benefit Zoetis over the long run, since it will mean higher demand for its products directed at companion animals, so long as Zoetis can continue innovating.
Second, Zoetis should also benefit from human population growth -- though richer countries are having fewer children, that's not necessarily the case elsewhere. With a growing global population to feed, there will be a higher demand for protein-rich food sources (like cattle) and the products to care for them, which will also work to Zoetis' advantage.
Meanwhile, the company has an impeccable dividend program. The company has increased its payouts by 502% over the past decade. Yet, its payout and cash payout ratio remain very conservative. The latter is just 34%, granting it plenty of room to grow its dividends even more without worrying about running out of cash.
Some might point out that Zoetis' forward yield is 1.3%. Although that equals the S&P 500's average, it's not particularly high. Despite its unimpressive yield, Zoetis is an excellent income stock given the strength and direction of its business and its low payout ratio. This stock is a wonderful option for dividend investors focused on the long game.
