Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. Therefore, finding a solid dividend takes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to take a look at one dividend-paying company that you can put in your portfolio for the long term without much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock.
This week we're going to take a look at medical device maker Medtronic
There are a lot of reasons to like Medtronic; but, to me, none stands out more than that it just makes sense. Although I wouldn't go so far as to call Medtronic's huge portfolio of medical therapies a necessity, many of its products have become the standard devices that hospitals turn to. As long as the world's population is increasing, barring a Mayan-calendar-inspired catastrophe later this year, the need for medical equipment is only going to increase as well. This essentially means the sky is the limit for Medtronic and its shareholders.
Having a constant demand for its medical devices also translates into relatively predictable bottom-line growth. Over the past decade, Medtronic shareholders have been privy to rising sales in each year, as well as an increasing dividend payout. Since 2001, Medtronic's dividend has grown by an average of 15.4% annually:
Source: Dividata
A decade of consistent profits and extremely tight-ranging gross margins has made these dividend increases almost predictable. With Medtronic's payout ratio at only 29%, investors can almost certainly expect it to continue its 34-year-long streak of increased dividend payouts.
Even if I wanted to make it all about the dividend, I simply can't ignore just how inexpensive Medtronic is relative to some of its competitors.
|
Company |
Forward P/E |
5-Year Revenue CAGR % |
Price/Cash Flow |
Dividend Yield |
|---|---|---|---|---|
| Medtronic | 10.5 | 7.1% | 9.8 | 2.5% |
|
Boston Scientific |
12.8 | 4.4% | 8.3 | NM |
|
Thoratec |
18.4 | 13.7% | 18 | NM |
|
Stryker |
13 | 8.5% | 15.9 | 1.6% |
|
Zimmer Holdings |
10.9 | 5.1% | 9.7 | 1.3% |
Source: Morningstar. NM = not meaningful. CAGR = compounded annual growth rate.
Reinforcing that consistency I spoke of, Medtronic comes in with the lowest forward P/E of its peers and pays out the highest dividend. Boston Scientific sports a lower price-to-cash flow, but it also has the slowest sales growth of the group, so that isn't surprising. Likewise, Thoratec is growing like wildfire next to Medtronic, but without a dividend and at nearly double the price-to-cash flow of its peers, it looks like a pass to me as well.
Foolish roundup
Finding a great dividend isn't rocket science. Sometimes it really is as easy as choosing the most dominant company in a rapidly growing sector -- and for medical devices, Medtronic is that company. I'm so confident in its future success that I'm also going to make a CAPScall of outperform on Medtronic. The question now is: Would you do the same?
Share your thoughts in the comments section below and consider adding Medtronic to your free and personalized watchlist so you can keep track of the latest news stories moving the stock.
Also, if you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "11 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!
