Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in medical appliances and equipment offer the most promising dividends.
Yields and growth rates and payout ratios -- oh my!
Before we get to those companies, though, you should understand just whyyou'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times and bolster it during market downturns.
As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."
When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.
When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors: the current yield, the dividend ratio, and the payout ratio.
If a company has a middling dividend yield but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.
Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.
Peering intomedical appliances and equipment
Mine Safety Appliances is among the highest-yielding stocks among medical appliance and equipment companies, offering a 2.8% yield recently. But it's not necessarily your best bet. Its dividend growth rate, at 7.7%, could be higher, and its payout ratio is higher than other compelling peers.
Even more worrisome in the payout ratio department is Invacare (NYS: IVC) , which has no ratio at all, due to having negative earnings per share. The company, yielding just 0.3%, has plenty of fans who like its prospects in long-term equipment rentals, but it's also dealing with an investigation by the FDA into some of its procedures.
Instead, let's focus on the dividend growth rate first, where Medtronic (NYS: MDT) leads the way with a five-year average annual dividend growth rate of 18%. That growth rate may be hard to maintain for long, but its low payout ratio of 31% makes that far from an immediate concern. The company has been impressing investors with its moves into emerging markets, where revenue is growing briskly, and its cost-cutting, which can boost profit margins.
Some medical appliance and equipment companies, such as MAKO Surgical (NAS: MAKO) and Opko Health (NYS: OPK) , don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. MAKO makes robotic surgical equipment and has been topping analyst estimates as its wares sell briskly. As it adds new applications for its machines (such as hip work, which was added recently), its profit potential will grow still more. Opko is an interesting case, as it's heavily shorted and has been in the red for many years now, but its insiders have also been snapping up shares, which is auspicious.
As I see it, Medtronic offers the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. St. Jude Medical (NYS: STJ) , yielding 2.3%, is also worth watching. It reinstituted its dividend about a year ago and recently upped it by 10%. The company is investing in 18 growth markets, and it's spending heavily on research and development. These bode well for the company, though there are always risks, such as a tougher regulatory environment.
Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.
Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.
Looking for someAll-Star dividend-paying stocks? Look no further.
At the time thisarticle was published LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter, owns shares of MAKO Surgical and Medtronic, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of St. Jude Medical, Medtronic, and MAKO Surgical.Motley Fool newsletter serviceshave recommended buying shares of MAKO Surgical. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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