Why I'd buy this dividend stock over Barclays plc

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Barclays

Despite making progress on its restructuring programme, Barclays(LSE: BARC) has struggled to win favour with investors this year. Indeed, year-to-date the shares have fallen 17%, underperforming the broader FTSE 100 by 20%. 

It seems that investors are struggling to regain trust in Barclays following years of disappointment from the bank. Third quarter numbers did little to reassure stockholders. While overall pre-tax profit rose 32% to £1.1bn, it missed City targets of £1.4bn. Net operating income fell about 4% to £4.5bn as the lender's key common equity Tier 1 capital ratio remained unchanged at 13.1%. More troubling was the performance at its investment bank unit. 

Equity and credit trading revenue each dropped more than 20%, while rates and foreign-exchange trading, known as macro, fell 40% resulting in an overall decline in profitability of 31%. 

These figures are hardly reassuring and show that the bank is still far from returning to its former glory -- bad news for income-focused investors. 

Income seekers should look elsewhere 

After cutting its payout at the beginning of this year, investors have been waiting for Barclays' recovery to take hold, underpinning potential for  dividend increases. 

However, the third quarter figures offered no insight into when the bank would increase its dividend, leading to speculation that it might take longer than expected to return to previous levels. The shares currently only yield 1.7%. 

Defensive growth 

Mediclinic International(LSE: MDC) offers shareholders a similar level of income, but unlike Barclays, its dividend has plenty of room for growth. 

As one of the world's leading healthcare companies, it is a highly defensive business. Unfortunately, the company is currently facing some headwinds to its business model in Switzerland and the Middle East due to lower patient volumes, insurance mix change, and expansion costs. These headwinds cut operating profit for the six months ended September 30 by 21%, and underlying earnings fell 11% to £84m from £94m. Exceptional costs pushed the group to an overall loss for the period. 

Nonetheless, Mediclinic's top-line revenue growth of 10% shows that the company is heading in the right direction. 

Shares in the global healthcare business have taken a beating this year as concerns about its high debt levels and rising costs have put investors off. Over the long term however, I believe that the company has an enormous opportunity ahead of it. 

Building the business

Mediclinic is a recovery play. The company operates in a defensive industry, so there's little risk that customers will suddenly start to avoid the business (it provides an essential service), which means management has time to turn the ship around. 

When its investment phase is over, the company can switch to cash generation and pay down debt, as well increasing its dividend to investors. 

The shares currently yield 1.4%, but the payout is covered just under four times by earnings per share, which gives plenty of room for dividend growth when management decides to tone down investment. On the other hand, if investment continues, shareholders should benefit from increased EPS growth. Pre-tax profit has risen nearly 10-fold during the past five years. 

Looking for other income plays? 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Barclays. 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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