How Dividends Change the Game for UnitedHealth Stock

The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Today we're looking at the newest addition to the Dow Jones Industrial Average . UnitedHealth Group currently offers a modest dividend yield of just 1.6%, which is far below the premium index's average yield of 2.6%. Only four of the other 29 Dow members offer yields lower than this stock's.

But the story changes quickly if you look at some other important metrics. No other Dow stock has kept up with UnitedHealth's dividend increases over the last decade -- or even come close.

UnitedHealth has boosted its payouts by an annual average of 62% over the last decade. The closest challenger on this crucial metric is McDonald's with a paltry 29% annual increase. Microsoft comes next with a 28% compound average dividend boost.

It's not a completely apples-to-apples comparison, of course. UnitedHealth used to sport a token dividend of $0.03 per year. When the Obamacare act passed, UnitedHealth felt the need to reassure investors that everything would be all right, so it pumped up the payouts to $0.50 a year in one fell swoop.

McDonald's and Microsoft haven't seen any such incentive to juice up their payouts in recent memory, although Mr. Softy didn't pay dividends at all until 2003. Even so, UnitedHealth's massive one-time boost made a bigger difference than Redmond's decade of reliable but modest increases.

But the company has also shown solid commitment to strong increases, even after that single-shot jump. UnitedHealth's dividend has grown from $0.54 per share to $0.92 per share over the last two years, which works out to a 30.7% annualized boost. Yep, that's still faster than the Dow elite: McDonald's boosted payouts by just 12.5% a year over the same period, and Microsoft settled for 15%.

Moreover, UnitedHealth has more headroom for even juicier increases than most of its Dow peers. The company diverted just 17% of its trailing earnings into dividend checks. Microsoft's payout ratio sits at 34%, and McDonald's shells out 55%. In other words, I would be surprised if UnitedHealth put the brakes on its dividend growth before its closest growth rivals.

So UnitedHealth may not offer the Dow's richest yield today, but the stock certainly seems headed for strong dividend increases for the long term.

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Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of UnitedHealth Group and McDonald's. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. Motley Fool newsletter services have recommended creating a bull call spread position in McDonald's. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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