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Why you should own this dividend share instead of Commonwealth Bank

If you’re after dividend income, I think that Paragon Care Ltd (ASX: PGC) would be a better dividend share choice compared to Commonwealth Bank of Australia (ASX: CBA).

Paragon Care is a healthcare product distributor of items like beds, devices and surgery equipment. It sells those products to hospitals (public and private), as well as aged care providers and other healthcare operators.

Here are some reasons why I think Paragon is a better dividend choice than Commonwealth Bank:

Earnings growth

I believe earnings growth is essential for any dividend share, otherwise the dividend may come under pressure. Without earnings growth the dividend can’t grow sustainably.

Paragon’s underlying earnings per share (EPS) grew by 6.4% in FY18, compared to Commonwealth Bank’s cash EPS which fell by 6.2%.

Paragon has already signalled at its AGM that it had achieved organic revenue growth of around 7% in this financial year so far.

Dividend growth

Between 2016 and 2018 the Commonwealth Bank dividend grew by 2.6% to $4.31. This growth over two years is less than CPI inflation.

Over the same time period the Paragon dividend has grown by 41% to 3.1 cents per share.

Dividend safety

There are many different metrics to judge if a dividend is safe, but I’m going to look at the dividend payout ratio which tells us how much of the profit is being paid out. That reveals how much wriggle room a company has and how much it is keeping to re-invest back into the business.

In FY18 the Commonwealth Bank dividend payout ratio was 80.4%. This compares to Paragon’s payout ratio of only 47% of underlying earnings. Paragon’s dividend looks a lot safer to me.

Valuation

Paragon is trading at under 9x FY19’s estimated earnings and Commonwealth Bank is trading at over 12x FY19’s estimated earnings.

Commonwealth Bank is cheap, but Paragon looks exceptionally cheap with a single digit forward price/earnings ratio.

Foolish takeaway

The only metric that Commonwealth Bank is more attractive than Paragon seems to be the actual dividend yield, with an 8.7% grossed-up yield compared to 7%. However, I’d much rather go for growth over a slightly higher initial yield.

Motley Fool contributor Tristan Harrison owns shares of Paragon Care Limited. The Motley Fool Australia has recommended Paragon Care Limited. 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 Scott Phillips.

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