The healthcare sector isn't known for its dividends. This isn't surprising when you consider that leading health stocks such as CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC) are trading on current yields of just 1.6% each.
But there are some healthcare stocks which do currently offer investors attractive yields
Consider Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) for instance – these two stocks currently offer shareholders yields of 3.9% (partially franked) and 4.5% (fully franked) respectively.
Income investors who focus on the near term will be quick to pick Primary given its higher yield, however I'd argue that this would be short sighted choice.
The key to investing – even when income is your key focus – is to look to the future and not consider yield without also considering capital appreciation.
Looking to the future means taking into account the growth prospects of a company. Past total shareholder return (TSR) performance data highlights why future growth matters. Over the past decade Primary has provided a TSR of a skinny 2.8% which is hardly an acceptable return considering the risks involved for investors. In comparison, Sonic has produced a ten year TSR of 9.9%. So for the past decade – even including dividends – Sonic has provided a better overall return than Primary.
A review of data provided by Morningstar shows that analysts are forecasting Sonic to grow its dividend from a current 67 cents per share (cps) to 77.6 cps in FY 2016. Meanwhile, consensus data for Primary suggests the dividend will only increase from 20 cps to 23.1 cps.
The better play
Based on these forecasts, the FY 2016 yield for Sonic and Primary are 4.6% and 5.2% respectively. In other words, in just two short years Sonic's yield will improve absolutely by 0.7%. Add to this the greater growth potential of Sonic's business and the stock's appeal cannot be written off simply by focusing on Primary's higher yield.
