The 3 Highest-Yielding Dividends Among Medical-Device Makers


As I say every week when I highlight one outstanding dividend-paying stock, "Dividend stocks are everywhere, but many just downright stink!"

It's not hard to locate a company willing to return at least some of its profit to shareholders, but finding one that will return a meaningful amount, and that shows the ability to grow that payout consistently over time, is the real challenge.

Today, I propose we take a closer look at the health-care industry, specifically the medical-device sector, which should become a big area of growth in the coming decades.

Source: Steven Fruitsmaak, Wikimedia Commons.

Why medical devices?
Two factors stand ready to drive medical device growth. First, an aging baby boomer population is almost certainly going to create a growing need for everything from implantable devices like hip and knee joint replacements to products such as insulin pumps. Demand for medical devices is also very inelastic, meaning pricing power and profits are almost assured to go up for a myriad of medical device makers.

The other growth driver is the Patient Protection and Affordable Care Act, which is set to be implemented on an individual basis by Jan. 1. Although this bill, known better as Obamacare, does mandate a 2.3% medical-device excise tax on top-line revenue and reduce profitability for device makers across the board, it also should bring millions of previously insured individuals into the fold. which may translate into more doctor's visits and a higher number of medical procedures. In essence, a little pain now for a big gain later!

The three highest-yielding medical-device stocks
With that being said, let's have a look at the three highest-yielding dividend stocks within the medical-device sector.

Smith & Nephew : 2.6% projected forward yield
Smith & Nephew is a U.K.-based medical-device maker that targets orthopedic reconstructive implants such as hip and knee replacements, and advanced wound management care products such as Durafiber and Acticoat for infection prevention. In the most recent quarter, Smith & Nephew delivered double-digit emerging-market growth (something my Foolish colleague Dan Carroll recently pointed out), while weak European growth caused sales in that region to be flat. Its sports medicine segment also delivered solid growth of 6%.

Although Smith & Nephew pays its dividend on a semiannual basis, which can certainly vary from payment to payment, there has been an undeniable trend higher in its annual payout, which is up about 195% over the trailing decade.

*Based on trailing 12-month payout and assumption of $0.495 payout in second half of 2013.

Medtronic : 2% projected forward yield
Medtronic is a medical-device company with a focus in two primary areas: cardiovascular implants (pacemakers, heart valve replacement technologies, etc.), and restorative therapies (it's the largest producer of implantable spinal therapy devices). Medtronic CEO Omar Ishrak has made no qualms about his company's focus on emerging markets for growth with U.S. and European sales slumping in recent years. In Medtronic's fourth-quarter results we saw pacemaker and defibrillator sales rise by a steady 3% while spinal treatments and neuromodulation devices beat the retreat by 1% and 6%, respectively.

Medtronic has certainly been no slouch on the dividend front, either, and in June it boosted its annual payout for a 36th straight year, placing it among the market's most elite dividend-paying companies. Since 2004, Medtronic's annual payout has grown by a whopping 234%!

*Assumes quarterly payout of $0.28 for remainder of 2013.

ResMed : 2% projected forward yield
Like the previous companies, ResMed has operations on a global scale, but unlike the preceding device makers, its focus is on medical equipment that helps diagnose and treat sleeping disorders. Whereas growth at Smith & Nephew and Medtronic has been slow-and-go in recent quarters, ResMed has seen sales take off. In its recently reported fourth-quarter results, ResMed delivered record quarterly revenue and income of $414.6 million and $86.2 million. Revenue in its Americas and combined Europe/Asia Pacific regions rose by 11% and 12%, respectively, with the company announcing a 47% increase to its quarterly dividend.

ResMed only began paying a dividend in 2012 ($0.17/quarter), but I'd consider it a pretty encouraging sign that the company has already decided to boost its payout by 47% just a year later.

A sneaky play
Sometimes the highest-yielding or most obvious plays may not make the best choices for an income investor. In this case I have absolutely nothing against any of the aforementioned medical-device makers from an income perspective, but I think investors looking for medical device growth and dividend income would be doing themselves a disservice by not taking a closer look at Johnson & Johnson .

J&J is a fully global diversified health-care company operating out of three segments: pharmaceutical, health-care products, and medical devices. Just last year, J&J completed a hefty $19.7 billion purchase of Synthes, which filled one of the few voids in J&J's dominant growth scheme: exposure to implantable device sales in emerging markets. With J&J you get a company that's raised its payout for 51 consecutive years and is currently yielding what would be a sector-topping 2.9%.

*Assumes quarterly payout of $0.66 for remainder of 2013.

One medical-device maker to avoid
While it's certainly far from a disaster case, I believe income seekers looking at orthopedic reconstructive-device maker Zimmer Holdings would be better served looking elsewhere. From a cash perspective, Medtronic and ResMed both carry net cash positions, while Smith & Nephew and Zimmer both lug around net debt positions. Zimmer's net debt of $450 million, though, is more than double that of Smith & Nephew and acts as an added drag when it comes to raising its dividend or making earnings-accretive acquisitions.

Another recent concern is Zimmer's loss in court with regard to a surgical irrigation patent dispute with Stryker, which saw $228 million in damages and interest levied against the company. There seems to be little reason for Zimmer to boost its dividend meaningfully, given this litigation and its already high debt levels. I can think of plenty of places to get a 1% yield or better, and Zimmer is not one of them.

As you can see, one of the best parts of owning medical device stocks is their attractive dividends, but smart investors know the importance of diversifying -- seeking high-yielding stocks from multiple industries. The Motley Fool's special free report "Secure Your Future With 9 Rock-Solid Dividend Stocks" outlines the Fool's favorite dependable dividend-paying stocks across all sectors. Grab your free copy by clicking here.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends Johnson & Johnson. It also owns shares of Medtronic, and Zimmer Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published