Should You Trust This Top Health-Care Dividend?

Should You Trust This Top Health-Care Dividend?

The medical-device industry isn't probably the first place you'd think to find great, high-yielding dividend stocks. While other players in health care -- notably Big Pharma -- offer some truly great dividends, many medical-device stocks focus more on growth and innovative products. However, income investors can't ignore one of the industry's largest players, Medtronic .

With a 2.1% dividend yield, Medtronic's not the biggest dividend stock on the block. But this company's the world's largest pure medical-device maker and one of the strongest players in health care. Should income investors add it to their portfolio?

The numbers line up
Medtronic's 2.1 yield might not sound like a lot, but it stands tall with some of the other major stocks in the health-care field. Abbott Labs , which competes with Medtronic in the cardiovascular device space, sports only a 1.6% yield by comparison, despite being a strong pick for any income investor in its own right.

Like Abbott, Medtronic's also a member of the esteemed dividend aristocrats, or those companies that have raised their dividend every year for at least 25 years. Past performance may not be indicative of future results, but it's a testament to Medtronic's stability over the past that the company has stuck by income investors over more than two decades.

Medtronic also has plenty of flexibility to boost that modest yield in the future. The company's dividend payout ratio of just 31% -- right around the S&P 500 average at the end of last year -- is lower than many of the more prominent dividend stocks in health care. Abbott, by comparison, carries a 52% payout ratio. Unusually strong or weak earnings over the recent past can influence the payout ratio, but Medtronic's earnings have been steady over the past three years.

But the dividend itself isn't all there is to a strong dividend stock. Top picks for income investors also need to be steady and strong -- and that's where Medtronic's topping the charts among medical-device makers.

Growth and stability for the long run
Like many medical-device makers, Medtronic's toughed out pricing pressures and tough competition over the past few years, problems that have taken a toll on the company's top and bottom lines. However, Medtronic's lessened its reliance on slow-growth areas recently and focused on growing new businesses -- strategies that should play out well for the long term, especially for income investors concentrated on steady growth over the coming years.

The cardiac rhythm management industry, which includes pacemakers and other cardiovascular systems, has taken an especially damaging hit of late, but Medtronic's made the best of a bad situation. In 2011, Medtronic's cardiac disease rhythm management segment accounted for more than 32% of total sales. In the 2013 fiscal year, that number had fallen to below 30%.

Diversity makes some of the strongest health care companies -- such as the aforementioned Abbott -- and Medtronic's in no shortage of it. While defibrillator sales have fallen, Medtronic's grown sales of neuromodulation products, which gained 3% in the most recent quarter alone, diabetes, and surgical products strongly.

These smaller but growing divisions are paving the way for Medtronic's bright future. Neuromodulation's been an industry that many across the device industry are looking into: Boston Scientific's neuromodulation segment grew more than 14% in the first half of 2013 alone, and other companies also are seeing strong growth from this market. If Medtronic can continue tapping into this and other growth industries, it'll be able to counter falling sales in some of its cardiovascular businesses until Medtronic can get those segments turned around.

The right outlook for income investors
Between advancing on high-growth businesses and pushing international growth into developing economies, Medtronic's setting investors up for strong years to come. The company's always been among the most stable in the device industry because of its size and strength -- attributes stability-seeking income investors won't shy away from.

Coupled with a respectable dividend yield at a manageable payout ratio -- along with an industry-topping history of dividend increases -- Medtronic is a stock no income investor could be criticized for taking a long look at.

Health care's top dividend stocks like Medtronic are a great foundation for every portfolio, but they're just a start on your road to financial freedom. One of the keys to making the most out of your portfolio is diversification-finding great stocks across the market's many industries. If you're on the lookout for high-yielding stocks outside of the health care sector, 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. Grab your free copy today by clicking here.

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Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic. 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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