Dividend Achievers for the Long Haul, Part 2

Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This is part 2 (click here to view part 1) of a series of articles on companies within the dividend achievers index that I consider to be the "best of the best." This index contains approximately 200 companies that include some of the best dividend-paying opportunities in the U.S.

In order for a company to be included in this index, it must increase its annual dividend for a minimum of ten consecutive years. Companies that have the ability to increase their annual dividend for ten or more years are typically well managed and have sustainable business models, resulting in consistent earnings growth over the long term. 

Investing in a diverse group of companies that are components of the dividend achievers index can result in very attractive returns over the long term, particularly when reinvesting the dividends.

Dividend achievers for the long haul

Medtronic (NYSE: MDT) is the world's largest medical technology company, with operations in 120 countries. Its businesses are divided into the Cardiac and Vascular segment and the Restorative Therapies segment.

The Cardiac and Vascular segment consists of a large number of vital products including pacemakers, implantable defibrillators, heart monitors, balloon angioplasty, stents, heart valves, and catheters. This business segment represented 52% of Medtronic's sales in 2012.

The Restorative Therapies segment consists of spinal systems, neuromodulation products, surgical technologies, orthopedics, and diabetes care products. This business segment represented 48% of Medtronic's sales in 2012.

38% of Medtronic's 2012 sales resulted from new products that were introduced during the last three years. This illustrates Medtronic's effectiveness in developing innovative and successful new products, such as the CoreValve transcatheter aortic heart valve and the RestoreSensor neurostimulator.

The medical technology industry is extremely competitive, and one of Medtronic's competitors is Stryker Surgical (NYSE: SYK). Stryker is a diverse and growing medical technology company, and is also a component of the dividend achievers index.

Stryker's products are currently divided into the following three business segments: Reconstructive, Medical & Surgical, and Neurotechnology & Spine. Each of these business segments have excellent potential for growth, due to a large number of very successful products, including the MDM X3 Modular Mobile Bearing Hip, which has enormous potential in the total hip replacement market.

It is a known fact that people are living longer, and as the baby boomer population ages, the medical technology market will grow significantly. Also, medical devices are a necessity and are needed regardless of the state of the economy. For these reasons, I believe that the medical technology industry offers many excellent candidates for your watch list, and Medtronic and Stryker Surgical are two of the best.

Aflac (NYSE: AFL) is a provider of supplemental insurance plans in the U.S. and in Japan. Its wide range of supplemental policy types include accident, cancer, dental, life, medical, short-term disability, and vision.

Aflac is well-known for its marketing campaign involving the Aflac Duck, which has become an international icon. The Aflac Duck helped transform Aflac into a very successful and well-known international brand.  Aflac's current business strategy is to expand its policy types and to continue growing its distribution network, which currently includes over 60,000 licensed agents in the U.S. and nearly 20,000 sales agencies in Japan.

One of Aflac's competitors is UnitedHealth Group (NYSE: UNH). UnitedHealth Group is the largest and most diversified provider of healthcare products and services. In addition to a wide variety of insurance products, UnitedHealth Group provides wellness solutions, behavioral solutions, financial services, healthcare technical solutions, and pharmacy benefit management services.

UnitedHealth Group offers a much larger mix of successful products and programs than the typical health insurance company and as a result has good growth potential, even though it is a very large company. UnitedHealth Group is currently not in the dividend achiever index, but the company has boosted its dividend significantly over the last several years including its recently announced 32% dividend increase.

Aflac is a much smaller company than UnitedHealth Group, and due to its impressive branding success, I believe the company has enormous growth potential. Down the road, I believe that Aflac could become as diverse and successful as UnitedHealth Group by expanding its existing policy types as well as initializing new programs such as wellness services. Also, the sky is the limit if Aflac manages to expand successfully into other global locations in addition to the U.S. and Japan.

The rest of the story

Aflac, Medtronic, Stryker, and UnitedHealth Group all have a long history of delivering earnings growth, which has allowed these companies to reward their shareholders with regular dividend increases. The following chart illustrates their financial results over the last decade:

<table> <tbody> <tr> <td> </td> <td><strong>2012 revenue</strong></td> <td><strong>10-yr share price growth</strong></td> <td> <p><strong>10-yr revenue growth</strong></p> </td> <td> <p><strong>10-yr earnings growth</strong></p> </td> <td> <p><strong>10-yr dividend growth</strong></p> </td> <td> <p><strong>Dividend yield</strong></p> </td> <td> <p><strong>Current P/E</strong></p> </td> <td> <p><strong>Payout ratio</strong></p> </td> </tr> <tr> <td> <p><strong>AFL</strong></p> </td> <td> <p>$25.4 billion</p> </td> <td> 62%</td> <td> 122%</td> <td> 280%</td> <td> 350%</td> <td> 2.5%</td> <td>8.7</td> <td>21%</td> </tr> <tr> <td> <p><strong>MDT</strong></p> </td> <td> <p>$16.2 billion</p> </td> <td> 20%</td> <td> 78%</td> <td> 74%</td> <td> 250%</td> <td> 2.1%</td> <td>15.2</td> <td> 31% </td> </tr> <tr> <td> <p><strong>SYK</strong></p> </td> <td> <p>$8.7 billion</p> </td> <td> 91%</td> <td>155%</td> <td>210%</td> <td> 1400%</td> <td>1.6%</td> <td> 20.6</td> <td> 29%</td> </tr> <tr> <td> <p><strong>UNH</strong></p> </td> <td>$110.6 billion</td> <td> 155%</td> <td> 284%</td> <td> 200%</td> <td> 14,800%</td> <td> 1.75%</td> <td> 12.4</td> <td> 20%</td> </tr> </tbody> </table>

Ten years ago, Aflac's dividend yield was 1%, Medtronic's was 0.6%, Stryker's was 0.2%, and UnitedHealth Group's was 0.03%. However, if an investor would have purchased shares of these companies ten years ago and held them until today, their effective yield based on the initial purchase price would be 5.2% for Aflac, 2.5% for Medtronic, 3% for Stryker, and 4.8% for UnitedHealth Group. This is an example of how your effective yield will grow over time when investing in dividend achiever companies. All four of these companies have relatively low payout ratios, and I anticipate strong future dividend growth from them.

As you can see from the table, the share price of each of these companies has significantly lagged earnings growth over the last decade. In addition, they all have relatively low P/Es, especially Aflac. As a result, I believe that now is an attractive time to invest in these companies.

The Foolish summary

Components of the dividend achiever index are growing, reliable, and shareholder-friendly businesses that can become multi-baggers in the long term for patient investors. Aflac, Medtronic, and Stryker are attractive dividend achievers that are worthy of being included as part of a diverse, well-managed portfolio. In addition, I believe that UnitedHealth Group will join these three companies in the dividend achievers index and, as such, that it deserves consideration for a spot in your portfolio.

When President Obama was reelected, shares of UnitedHealth and other health insurers fell immediately. Is Obamacare a death knell for health insurers, or is the market missing out on some of the opportunities the law presents? In this brand new premium report on UnitedHealth, The Motley Fool takes a long term view, honing in on prospects for UnitedHealth in a post-Obamacare world. So don't miss out — simply click here now to claim your copy today.



Greg Williamson owns shares of Stryker, UnitedHealth Group, and Medtronic. The Motley Fool recommends Aflac and UnitedHealth Group. The Motley Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus