When searching for income stocks, I reckon the most important aspect is consistency of returns rather than an enticing double-digit yield! After all, dividends are paid at the discretion of the business and can be cut or cancelled at any time.
One passive income stock I want to take a closer look at is Smith & Nephew (LSE: SN.).
Hip replacements and orthopaedics
Smith & Nephew is a medical technology business best-known for its orthopaedics division and hip replacements.
Smith shares have struggled in recent months. Over a 12-month period they’re down 4% from 1,072p at this time last year to current levels of 1,023p. The shares are down over 20% from April levels of 1,314p to current levels. A combination of macroeconomic volatility and falling performance has led to this, in my opinion.
The bull and bear case
From a passive income perspective, it’s hard to ignore that Smith & Nephew has paid a dividend every year since 1937! There aren’t many income stocks that can attest to such a remarkable feat. At present, a dividend yield of 3% looks good to me. Plus the dividend at present looks well covered by over two times earnings. However, it’s worth remembering that past performance is never a guarantee of the future.
Next, due to the shares dropping, Smith’s valuation looks attractive too. The shares trade on a price-to-earnings ratio of just under 13. The FTSE 100 average ratio is 14.
Moving on, demand for Smith’s services could rise in the coming years due to the ageing population in the UK which could require more of its services. This boost could help performance and potential dividends soar, which is good news for potential investors like me.
Looking at the bearish aspects, Smith’s procedures are elective. This non-essential nature of its work means they can be put off and pushed down the line in some instances. For example, this happened a lot during the pandemic period. This is a risk I’ll keep an eye on as it could impact performance and potential payouts.
Another risk of note is the speculation that the rise of weight loss drugs could reduce the need for hip replacements. This could hurt Smith & Nephew. However, it’s worth noting that the business has diverse operations and is looking to grow in other potentially lucrative segments.
Finally, despite its impressive footprint and market presence, Smith & Nephew is still not as established or as wide reaching as competitors such as Johnson & Johnson.
My verdict
Overall, I think Smith & Nephew shares would go a long way to providing me with a second income stream. The business looks in good shape and its dividend record is enviable, as well as the fact the current dividend looks safe. Future prospects look solid too.
I don’t have the cash right now to add Smith & Nephew shares to my holdings but as soon as I do, I’ll consider adding some to my holdings. This is especially the case if they’re trading cheaply like at current levels.
