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Tickers in this Article: ABT, BAX, MDT, BSX
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.

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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 we believe investors should investigate these three 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 we 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, we believe dividend-seeking investors can get that coveted "twofer" here - income and growth.

Baxter
Like Abbott, Baxter (NYSE: BAX) does generate a meaningful amount of profit from business outside of what we call medical technology. Still, it is not a pharmaceutical company, so we 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.

Medtronic
Hard-core dividend enthusiasts may balk at Medtronic's (NYSE: MDT) relatively measly 2.4% dividend yield, but here we 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, this company has a good chance of showing above-average dividend growth in the years to come. (For more, see A Checklist For Successful Medical Technology Investment.)

Three Good Places To Start
Of course, it is vital for every investor to do his/her own due diligence. Given the considerable structural advantages to both healthcare and dividend-paying stocks as investment categories, investors could find the combination to be quite powerful for their own portfolios. (For more, see Dividend Yield For The Downturn.)

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