With interest rates still sitting near record lows, investors looking for current income have been forced to move from fixed income positions and into stocks to find yield. To help offset those risks, one of the first things dividend investors do is look for companies operating in defensive industries such as St. Jude Medical, Inc. (NYSE:STJ) . But before doing the foolish thing and taking this dividend for granted, let’s take a closer look at whether it’s truly worthy of a spot in your portfolio.
Health is priceless; health care isn’t.
As a medical-devices company, St. Jude Medical, Inc. (NYSE:STJ) benefits from many of the unique elements of the industry that make it attractive for dividend investors. We all know it’s impossible to put a price on one’s health and well-being. Because of that, the health-care sector at large is much less sensitive to downturns in consumer spending. This dynamic, along with the aging and increasingly unhealthy society that we’re all well aware of, is a key reason health-care spending will continue to grow.
But while these big-picture trends might be driving the overall industry, investors looking at specific health-care dividend stocks need to dig a layer deeper to understand the company-specific issues at work. After all, dividends aren’t a guarantee, and if the going gets tough enough, even a “stable” health-care stock could cut — or eliminate — its dividend. With that being said, let’s check on where St. Jude Medical, Inc. (NYSE:STJ)’s dividend has been, and try to determine where it’s going.
A quick-and-dirty technique for checking a dividend’s sustainability is looking at something called the payout ratio. Typically, this is expressed as a percentage, looking at a company’s dividend per share relative to its net income per share. That’s a decent start, but I prefer to use a slightly different measurement that replaces net income, an accounting measurement, with something more tangible — cold, hard cash. Let’s see how much of St. Jude Medical, Inc. (NYSE:STJ)’s free cash flow has been eaten up by its dividend payments over the past two years. The lower, the better, suggesting more capacity for future dividend increases.