Yielding 3%, is this struggling medical stock ideal for long-term passive income?

Sumayya Mansoor wonders whether this avoided medical stock could provide her holdings with passive income once the market normalises.

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It’s easy to be tempted by high-yielding dividend stocks that could boost my passive income now. However, I’m more interested in quality businesses that could pay me dividends consistently.

With that in mind, I want to see if Smith & Nephew (LSE: SN.) could be an ideal candidate to do so.

Medical devices

Established in 1931, Smith & Nephew is a medical devices business that offers orthopaedics, sports medicine, ENT, and advanced wound management care using technology at the forefront of its offering.

The shares have been somewhat unloved recently. This is due to the elective nature of its core offering and the fact elective surgeries have been put on the back burner since the pandemic. For that reason, Smith & Nephew’s performance has been inconsistent and the share price has been on a poor run.

Over a 12-month period, Smith & Nephew shares are down 9% from 1,010p at this time last year to today’s price of 917p. However, since macroeconomic volatility began to impact markets, the shares are down 30% from 1,314p in April to current levels.

Recovery on the cards?

The share price has also been impacted negatively by the rise of weight loss drugs on the market. Smith & Nephew’s forte is hip replacements, and there is speculation that the rise of such drugs could mean there is less demand for these surgeries. If true, this would be bad news. But the company has diverse operations, as well as a good geographical footprint that should help grow its business in its other segments.

As for passive income, Smith & Nephew’s dividend yield of 3.6% is close to the FTSE 100 average of 3.8%. However, if the business continues to suffer there is a chance this could be cut or even cancelled as dividends are never guaranteed.

For me, the shares look decent value for money on a price-to-earnings ratio of just 12. This is lower than the FTSE 100 average of 14.

Another aspect that could help the shares recover is the ageing of the global population. This should mean that demand for surgeries, including its hip replacements and other medical devices, should increase. In turn, this could boost performance, its share price, and investor returns.

As well as the risks mentioned, I’m conscious that Smith is not the biggest fish in the pond. It faces competition from larger, better known competitors such as Johnson & Johnson.

A passive income stock I’m watching… for now

After reviewing everything, I’m going to keep an eye on Smith & Nephew shares for now. I’ll watch out for trading updates and other developments but I’m not going to buy any shares for my holdings today.

The shares look good value for money, and the passive income opportunity is enticing. However, there is no guarantee of any market turn around right now. Plus, it’s wrestling with some pretty fierce competitors in the marketplace. I believe there are better dividend stocks out there.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Smith & Nephew Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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