Investing in hearing device company Cochlear Limited (ASX: COH) for its dividend may seem counterintuitive. That’s due to it having a yield of 1.8% versus 4.2% for the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO). However, in my view Cochlear offers a consistent financial outlook and scope to increase dividends over the medium term. Therefore, I feel it has appeal for income-seeking investors.

Financial stability

Cochlear’s risk profile is relatively low. This means that its dividend payments should be robust and consistent in comparison to ASX peers. For example, Cochlear has a diverse geographical spread. It generates 43% of its sales from the Americas, 40% from Europe, the Middle East and Africa and the remaining 17% from Asia Pacific. Therefore, should one region endure a challenging period, the other regions can offset this.

The hearing device market has high barriers to entry. This enables Cochlear and its peers to experience relatively low competition. Further, Cochlear has a strong reputation among customers for quality and innovation. This increases customer loyalty which provides more stable and resilient financial performance. Cochlear’s customer loyalty was enhanced by the recall of the Nucleus 5 implant in 2011. Although it caused Cochlear’s shares to fall in the short run, it showed that the company put customers first.

Cochlear invested $143 million in product innovation in the 2016 financial year. This was an increase of 12% on the prior year. This helps to strengthen its competitive position versus peers and means that its dividend is increasingly robust.

Dividend growth

As well as a resilient dividend, Cochlear’s income prospects are enhanced by its earnings growth potential. It is estimated that 600 million people worldwide are affected by hearing loss. However, only 500,000 of them have received a hearing implant. A key reason for this is a lack of affordability in the developing world. This provides growth potential for Cochlear as wealth across the emerging world continues to grow.

Further, Cochlear has improved the efficiency of its global supply network in order to access more customers. It has moved to ownership of the majority of its global distribution network which provides it with greater marketing control. This should enhance customer loyalty and improve Cochlear’s earnings growth outlook through a more direct engagement with potential customers.

Cochlear also has scope to leverage its direct-to-patient communications through Cochlear Link. This allows it to cross-sell products and services to existing customers. The potential for upgrades to existing products remains high. For example, the majority of implant recipients are yet to upgrade to the Nucleus 6 sound processor. This should provide a consistent and high rate of earnings growth over the long run.

Outlook

In the next two financial years, Cochlear’s dividend payments are forecast to rise at an annualised rate of 16.5%. This puts it on a forward yield using financial year 2018’s forecast dividend payments of 2.3%. This is behind the yields on popular income stocks such as Wesfarmers Ltd (ASX: WES), Commonwealth Bank of Australia (ASX: CBA) and Insurance Australia Group Ltd (ASX: IAG). They yield 5.6%, 4.3% and 4.8% respectively. However, in the long run I believe that Cochlear could become an appealing dividend stock due to its mix of dividend stability and dividend growth prospects.

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

Our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a fat fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Robert Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.