When the market gets in correction mode, hopefully, it stokes the desire to seek out opportunities. One of the areas that can be fruitful are identifying income stocks, and what better list to start than the Dividend Aristocrats. One of the stocks that is jumping out right now is Cardinal Health Inc (NYSE: CAH).

Let’s explore what defines a good dividend investment in the current climate.

Investing for Dividends

The nature of an income investment like CAH tends to lead to longer-term holding periods. As a result, there are aspects to a company that are more attractive when you’re considering holding a stock for potentially years. Here is a list of potential considerations.

Large Cap Stocks

Large cap stocks are interesting in that they are generally in the mature stages in their cycle and have a large institutional ownership. This may increase the potential stability of its price if earnings remain stable.

Dividend Yield Greater than 3%

If you’re going to hold a stock for dividend purposes, you need to have a minimum standard. In our current interest rate environment, a 3% yield is a good place to start. However, you could adjust it lower if the company has stronger growth prospects and is a blend of growth and income.

Historically High Dividend Yield

A historically high dividend yield for a company is an indication of valuation. Looking at the 5-year average or the range of yield will give you an indication of whether the current yield is relatively high or low for that stock. It’s also good to see that the company has raised its dividend every year.

Defensive Sector

Looking at stocks in defensive-oriented sectors helps to provide additional stability in earnings and revenues. These companies also have a tendency to recover more quickly following a correction. Also, defensive non-cyclical companies typically outperform the market in a correction. Stability is the name of the game when income investing.

Attractive Valuation

Looking at dividend yield gets you part of the way there, but seeing that company is trading below it’s 5-year average for many valuation ratios is good to see. For example, EV/EBITDA, P/B and P/S trading below their 5-year average is a good starting point.

Stable Earnings and Revenue Picture

If a company plans to continue to pay and grow their dividend, they need a stable earnings picture. That can be defined by past earnings trends and future trends. Future trends are given by sell-side analysts. Seeing a company beat estimates and raise guidance is a good thing to see.

You may not be perfect in all the above criteria, but hopefully the list helps you understand the types of considerations that go into choosing a stock for dividend purposes.

How Does CAH Stack Up?

The starting point in identifying CAH as a potential candidate is its rather large retracement, inclusion as a Dividend Aristocrat and the high current yield. This is a great place to start, but it’s not all of it.

The next step is to evaluate the yield. The company currently pays a 4.18% forward yield, which is near that highest yield it’s paid in the past 10 years at 4.53%. The dividend growth rate has slowed in the recent years with a 5-year dividend growth rate of 3.4%.

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While healthcare companies aren’t exactly considered non-cyclical, they do tend to hold up better than as a class than other industries in a bearish climate. As a healthcare services and products company, they have been impacted by COVID policies. However, that industry is oftentimes more insulated than others.

Looking at EV/EBITDA, CAH is trading below it’s 10-year median value of 9.74 at 7.24. This value is not only relatively good, but it also compares very well against most other companies.

It’s price-to-sales ratio of 0.08 is also at a 10-year low.

Finally, let’s talk about the earnings picture. CAH has missed earnings estimates in three of the last four quarters. That’s not exactly a ringing endorsement. However, earnings trends for 2022 and 2023 have begun to stabilize in the past 90 days. Also, they have solid revenue and earnings projections in 2022 and 2023.

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CAH Technicals

Since 2018, CAH has been trading in a range from around $42 to $60. With the price near $47, it’s presenting an opportunity to buy in the lower end of its range. A retest of support would mean $5 of downside for possibly $13 of upside.

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Using the upcoming $0.49 dividend would allow you to cover most of the cost of a 21 JAN 22 $42.50 put to buy as a protection against 100 shares or a long put vertical spread. That means that you can hedge your downside in the coming 50 days against any large loss.

As the stock was testing its recent lows yesterday, there was also significant call option interest that materialized on CAH. The January 2022 55 calls were rolled to the March $55 contract. The roll was done as a debit and indicative of a continued expectation CAH will rebound in the coming weeks to months.

Conclusion

Nobody can perfectly predict what will happen to a stock. However, sometimes it’s nice to buy when the price is down and get paid to wait for it to rise. The timing appears to be relatively good to consider CAH for an income investment and it hits on many of the considerations I laid out in this post. Hopefully, this will at least give you a process to follow as you evaluate other income investments.