Medtronic Raised Its Dividend for a 47th Straight Year, But Here's Why It Isn't a Great Dividend Growth Stock

Dividend growth stocks can make for excellent long-term investments. Their ongoing rate increases allow investors to generate more in dividend income than if they were to just invest in a stale dividend with no increases, and which inflation chips away at over time.

Medical device maker Medtronic (NYSE: MDT) falls into the category of a dividend growth stock. The company, which makes products that help treat 70 health conditions and which has a massive global presence in 150 countries, has been increasing its dividend payments for decades and has been a reliable income-generating investment to buy and hold.

But while it recently announced yet another dividend increase, investors may feel a bit underwhelmed by it. Here's why Medtronic may not be a great dividend growth stock to own, even though it has such an impressive track record for increases.

Medtronic extends its dividend streak for 47 years

In May, Medtronic released its year-end results and also announced another increase to its dividend. This year will mark the 47th straight year in which Medtronic is paying investors more in dividends. The new quarterly payment of $0.70 will, however, represent just a one-cent increase from the $0.69 that the company was previously paying investors.

The modest 1.4% increase in the payout is part of a bigger trend for Medtronic, which is that its rate of dividend hikes has been slowing down drastically. A breakdown of the compound annual growth rate (CAGR) of its dividend payments highlights this pattern.

Data source: Medtronic.

Often when companies amass such impressive streaks, the incentive may be more about keeping the streak going than about actually making meaningful increases to the dividend. This appears to be the situation with Medtronic's most recent hike. It likely won't have a significant effect for many dividend investors.

Future rate hikes may be even more modest

Medtronic has been facing struggles in recent years due to COVID and supply chain disruptions which have weighed down its earnings, and thus, affected its ability to make large rate increases. But even with the company projecting up to 5% organic growth this year, that doesn't appear to be enough to entice Medtronic to opt for a larger dividend increase.

But it's not hard to see the problem, as the company's payout ratio is already fairly high. For the fiscal year ended April 26, Medtronic's earnings per share totaled $2.76. Its new dividend will cost $2.80 per share over a full year.

While the company is still growing its business and working on cost reductions, the stock's payout ratio could still end up well over 90% this year. There isn't a huge buffer there for Medtronic to be able to justify a larger increase to the dividend without resulting in investors worrying about the safety of the payout -- and many may already be concerned about how sustainable it is.

Can Medtronic still be a good dividend stock to own?

Medtronic's dividend yields 3.4%, which is more than twice the S&P 500 average of 1.4%. It can be a reliable dividend stock to own. But I wouldn't call it a great dividend growth stock, simply because the rate of its increases has been slowing over the years and they could be even smaller in the future.

However, as long as you temper your expectations about future dividend increases, Medtronic can still make for a good dividend investment to own in your portfolio. The healthcare stock trades at a modest 15 times its estimated future earnings, and its diverse mix of products should enable its operations to continue to grow in the long term.