Eli Lilly Is Putting Dividend Growth Stocks to Shame With Yet Another Huge Increase to Its Payout

Dividend investors often prioritize stocks that have long track records for raising their payouts. But that can be a mistake. A long streak doesn't necessarily make a dividend stock a good long-term buy. After all, those increases may only be modest, for the sake of keeping the streak going. And if a company increases its dividend by just one or two percentage points, that's not even going to offset inflation.

What Eli Lilly (NYSE: LLY) is doing is far more impressive. The company has been increasing its dividend at a high rate, and with a bright future ahead, there could be more generous rate hikes to come. While many investors may buy it for its growth potential, here's why it can also make for an exceptional dividend stock to buy and hold.

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Eli Lilly raises its dividend by 15% -- again

On Dec. 9, healthcare giant Eli Lilly announced the approval of a new $15 billion share buyback program and yet another significant dividend increase. For a seventh consecutive year, the company will be increasing its dividend by 15%. The new quarterly dividend of $1.50 per share, which will be payable in March, is 167% higher than the $0.5625 per share that Eli Lilly was paying shareholders back in 2018.

Technically, Eli Lilly doesn't have a very long dividend growth streak going; it stopped increasing its payout in 2010 after the financial crisis and wouldn't resume making rate hikes again until 2015. But while Dividend Kings may have longer streaks, that doesn't mean investors should expect better dividend growth. Here's how Eli Lilly compares to Johnson & Johnson and Becton, Dickinson, a couple of top healthcare stocks with dividend growth streaks of more than 50 years.

LLY Dividend data by YCharts

More dividend increases look probable for Eli Lilly

It's not just a stock's track record that investors should consider when choosing a dividend investment for their portfolio. What also matters is the likelihood of future dividend increases. If a business is in poor shape, a dividend streak isn't all that meaningful. All you need to do is look at Walgreens Boots Alliance, which slashed its dividend last year, even as it was approaching a dividend growth streak of 50 years. The business was, and still is, in a dire situation, and relying just on its past dividend growth as justification for investing in it would have resulted in a terrible mistake -- it's one of the worst stocks in the S&P 500 this year.

Looking ahead, Eli Lilly is in fantastic shape as it has a couple of promising drugs in its portfolio in Zepbound and Mounjaro. The former is a highly effective weight loss treatment while the latter contains the same active ingredient (tirzepatide) but is approved for diabetes. Both are generating billions for the business and are in their early growth stages. In addition, the company also recently obtained approval for its Alzheimer's treatment, Kisunla, which has the potential to be another blockbuster drug for the business.

There's so much growth on the horizon for Eli Lilly, and with the stock's payout ratio still at a fairly modest 54% of earnings, there is more room for the business to continue making generous dividend increases in the future.

Is Eli Lilly a no-brainer option for dividend investors?

Eli Lilly's dividend may look underwhelming as it yields less than 0.8%. But the yield would be much higher if not for the stock's massive 500%-plus returns over the past five years. Eli Lilly can be a source of great recurring income for your portfolio, but there will undoubtedly be higher-yielding options to choose from as the S&P 500 index average yield is 1.2%.

If, however, you're investing for several years or more, then Eli Lilly does indeed look to be a no-brainer buy. Between the possibility for growing dividend income and a rising share price, there's more than one way you can profit from owning the stock. Overlooking it due to its low yield could be a costly mistake for long-term investors as Eli Lilly is not just a good growth stock, but also a solid income-generating investment to hang on to for years.

Should you invest $1,000 in Eli Lilly right now?

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Becton, Dickinson And and Johnson & Johnson. The Motley Fool has a disclosure policy.