Investor appetites for big dividend yields continue to grow thanks to inflation-driven demand for extra passive income. However, while there are countless high-yielding opportunities across the London Stock Exchange right now, most look unsustainable in the long run.
Since I don’t want to keep juggling between different income stocks over the next decade and beyond, I’m hunting for a certain type of dividend stock. Specifically, I’m looking for one that doesn’t just maintain payouts but grows them each year as well. And that’s put Bioventix (LSE:BVXP) in my sights.
Sustainable passive income
For a company to supply continuously rising dividends, it needs two key traits. The first is to have a cash-generative business model. The other is to provide a product or service that will remain in demand for decades. Bioventix seems to have both of these characteristics.
It’s a biotech firm that specialises in manufacturing sheep monoclonal antibodies. In oversimplified terms, these are used in diagnostic medicine to detect heart disease, cancer, infertility, and potentially even Alzheimer’s if the latest ongoing tests prove successful.
Needless to say, detecting diseases isn’t likely to go out of fashion any time soon. And while there are other antibody suppliers around the world, Bioventix’s product portfolio has built a reputation for quality.
It’s undoubtedly a niche product. Yet demand continues to grow, enabling it to consistently boost revenue, earnings and free cash flow generation. So much so that the firm is entirely debt-free and has been consistently hiking its dividend for 10 years in a row.
Right now, the shares are offering a slightly better-than-average dividend yield of 4.1%. But based on analysts’ forecasts, this level of payout is set to continue growing to as high as 5.6% by 2026. And if the trends continue, it may rise even further thereafter.
Everything has its risks
Looking at the numbers, Bioventix’s track record is pretty admirable. And this has also been reflected in its stock price. Since going public in April 2014, the shares of the biotech group have climbed more than 600%!
However, even the best-looking businesses in the world have their weak spots. The difficulty of manufacturing monoclonal antibodies has proven to be quite a powerful barrier to entry against would-be competitors. Yet it’s also proven to be a handicap in terms of increasing production capacity.
At the same time, while diagnostic medicine is in constant demand, the types of antibodies required can be somewhat cyclical. The group’s Troponin antibodies have seen softer-than-expected sales, according to the group’s most recent interim report.
Furthermore, government changes to the headline corporation tax rate are also expected to adversely impact earnings as well as cash flows. This change is obviously out of management’s control. Nevertheless, it adds pressure to the group’s profitability and, in turn, dividends.
Despite these headwinds, I remain cautiously optimistic for this business. Its valuation comes with a small premium that invites some extra volatility. Yet given the long-term relevance of its products and the group’s impressive track record, it’s a premium I’m happy to pay. That’s why I’m planning on adding this business to my income portfolio once I have cash available.
