There are a lot of solid reasons for investors to include medical technology stocks in their portfolios. The healthcare sector has grown faster than the economy and seems poised to continue to do so, and the more established names in this field routinely post excellent returns on capital. Better still, medical technology is generally spared the feast-famine cycle of patent expirations that bedevil the pharmaceutical sector.

IN PICTURES: Eight Ways To Survive A Market Downturn

Now we can add another reason to like medical device stocks - dividends. As many investors already know, the stocks of companies that pay dividends tend to outperform those that do not. When you combine the advantages of dividend-paying stocks with the advantages of medical technology stocks, you have a powerful mix.

Four Names To Investigate
Not many medical device stocks pay dividends, but I believe investors should investigate these four names:

Abbott Labs
Admittedly, Abbott Labs (NYSE: ABT) is something of a "cheat" on this list, as the company does derive a sizable portion of its profits from pharmaceuticals. Nevertheless, this is a company with excellent long-term growth characteristics and compelling drivers for future growth. The company's new stent platform is capturing share from Boston Scientific (NYSE: BSX), and I believe many investors under-appreciate the quality and growth potential of Abbott's diagnostics franchise. With a solid long-term record of cash flow growth, a good return on capital, no major patent issues and manageable debt, I believe dividend-seeking investors can get that coveted "twofer" here - income and growth.

Like Abbott, I have to confess that Baxter (NYSE: BAX) does generate a meaningful amount of profit from business outside of what I call medical technology. Still, it is not a pharmaceutical company, so I believe it does belong here. Although Baxter has had some safety and reliability issues, the fact remains that the company invests heavily in innovation and can leverage two cash-rich businesses (medication delivery and renal) while waiting for recombinant and plasma-based therapies to drive the next leg of growth. Here, too, there is a solid history of cash flow performance and a good return on capital. Though Baxter does not appear to have the growth potential of Abbott, it is slightly cheaper.

Hard-core dividend enthusiasts may balk at Medtronic's (NYSE: MDT) relatively measly 1.9% dividend yield, but here I take a page from Wayne Gretzky - skate to where the puck is going to be, not to where it is now. In other words, while Medtronic may not have the highest payout today, I firmly believe that this company will show above-average dividend growth in the years to come. (For more, see A Checklist For Successful Medical Technology Investment.)

Medtronic is a huge player in a number of significant businesses, including cardiac rhythm management, stents, diabetes, spinal care and neurological intervention. While Medtronic is in the midst of an often-awkward transition from fast grower to mature growth, the company produces a lot of cash flow and does not have a record of making dumb deals with shareholders' money.

Becton Dickinson
I have written previously about boring-but-lovable Becton Dickinson (NYSE: BDX). I especially like the combination of a mature-but-lucrative device business and fast-growing molecular diagnostics platform. Like the other names in this article, Becton has posted impressive returns on capital and continues to generate ample free cash flow. Should Becton emerge as a leader in the still-evolving molecular diagnostics market (which could be worth tens of billions of dollars), that dividend payout could grow at an above-average rate over the coming years. (For more, see The Power Of Dividend Growth.)

Four Good Places To Start
Of course, it is vital for every investor to do his/her own due diligence. That said, I am bullish on each one of these names for both the dividend prospects they offer and their relative value in the market today. Given the considerable structural advantages to both healthcare and dividend-paying stocks as investment categories, I think investors could find the combination to be quite powerful for their own portfolios. (For more, see Dividend Yield For The Downturn.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  7. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  8. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  9. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  10. Stock Analysis

    The Biggest Risks of Investing in FireEye Stock

    Examine the current state of FireEye, Inc., and learn about some of the biggest risks of investing in this cybersecurity company's stock.
  1. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!