Healthcare is a diverse sector. And recent performance has been wide ranging (see data below). This is creating select, highly-attractive big-dividend opportunities ranging from individual pharmaceutical stocks, to healthcare-focused CEFs and even “healthcare” REITs, to name just a few. In this report, we rank our top 10 big-dividend healthcare opportunities, starting with number 10 and counting down to our top ideas.
As a primer on the diversity of healthcare opportunities, here is data on over 50 “healthcare stocks.” We put “healthcare stocks” in quotes because some are healthcare REITs (technically the real estate sector, not the healthcare sector) and some are healthcare CEFs (technically closed-end funds, not individual stocks). Nonetheless, they’re all healthcare related, and as you can see in the table below, performance has been diverse and dividend yields can be significant.
You likely recognize at least a few of your favorites in the tables above. You’ll also notice a variety helpful (hopefully) data points, depending on the type of investment, as well as year-to-date performance and current dividend yields.
Why Healthcare Now?
It can make sense to have an allocation to healthcare stocks for diversification and risk management reasons, especially as some opportunities can provide less volatility (and steady income) as macroeconomic conditions continue to deteriorate. For example, many large cap pharmaceutical companies (such as AbbVie (ABBV), Merck (MRK) and Amgen (AMGN)) have performed very well over the last year.
However, two healthcare subgroups that have performed particularly poorly are medical device companies and healthcare facility REITs. We’ll get into specific examples later in this report, but a big reason for the poor performance is because these subgroups are recovering from the pandemic at a significantly slower pace than expected. Specifically, this next chart shows how job openings have remained stubbornly high at healthcare organizations as they struggle to find enough “post-pandemic” workers to meet demand.
This phenomenon has negatively impacted certain pockets of healthcare stocks more than others, and it is also creating select attractive opportunities, as we will cover.
As alluded to earlier, another reason to consider the healthcare sector now is because of where we are in the market cycle. For example, it is often argued that healthcare stocks can perform well in the early recession part of the market cycle—a period which many investors believe we are about to enter.
While this may be true to some extent, it is our view that owning attractive companies over the long-term (throughout the market cycle) is a winning strategy, and if they pay big dividends—that can make it a lot easier for some investors to tolerate any near-term volatility. In our view, the healthcare sector is currently offering a select variety of attractive big-dividend opportunities.
Top 10 Big-Dividend Healthcare Opportunities
With that backdrop in mind, let’s get into our top 10 ranking, starting with number 10 and finishing with our top ideas.
10. Baxter International (BAX), Yield: 2.3%
Coming in at number 10 on our list, Baxter is an attractive healthcare equipment company. It has a long history of paying (and growing) its quarterly dividend, but the shares have fallen sharply this year as its recovery from the pandemic has been slower than expected. Specifically, as described above, patients are scheduling previously-postponed surgeries at a slower pace due to healthcare staffing issues, inflation and simply lingering pandemic concerns. Baxter announced third quarter results in-line with expectations, but lowered its full-year guidance as SG&A expenses rose (post-pandemic inflation).
If you are a disciplined long-term investor, Baxter is attractive. Specifically, it is the industry leader in many of the products it offers, and the business will improve over time. It also trades at an attractive earnings multiple (13.9x forward p/e). We’d have ranked this one higher, but its dividend yield is relatively low compared to other names on this list.
9. Tekla Healthcare Investors (HQH), Yield: 8.3%
Based in Boston, Tekla offer four closed-end funds focused primarily in the healthcare sector, and the Tekla Healthcare Investors Fund is currently attractive for a variety of reasons. For starters, it offers exposure to a wide variety of healthcare sector companies (it recently had around 150 holdings, including stocks like Amgen (AMGN), Gilead (GILD) and UnitedHealth Group (UNH)), thereby giving investors some instant healthcare sector diversification.
HQH currently trades at a ~10% discount to the value of its underlying holdings, or Net Asset Value (“NAV”), a wide discount by historical standards. Large discounts and premiums to NAV are a unique characteristic of CEFs (as compared to other mutual funds and exchange traded funds) and they can create unique risks and opportunities (we generally greatly prefer to buy attractive CEFs at large discounts).
Perhaps one reason why this fund currently trades at a wide discount is because investors may have been hitting the sell button as the quarterly dividend (technically a distribution) was recently reduced. As a matter of policy, the fund has a managed distribution policy:
The Fund has a managed distribution policy (the Policy) which permits the Fund to make quarterly distributions at a rate of 2% of the Fund's net assets to shareholders of record. The Fund intends, to the extent possible, to use net realized capital gains when making quarterly distributions. However, implementation of the policy could result in a return of capital to shareholders if the amount of the distribution exceeds the Fund's net investment income and realized capital gains.
Overall, if you are an income-focused investor, we view HQH as attractive for its large price discount (versus NAV), its very low use of leverage (recently 0.85%), its reasonable expense ratio (recently 1.19%) its attractive exposure to the healthcare sector, and its big distribution yield (paid quarterly).
*Honorable Mention:
Medical Properties Trust (MPW), Yield: 10.7%
Not officially on our top 10 ranking, we’re including MPW as an “honorable mention” because its big yield is hard to ignore. MPW has performed worse than most REITs this year (and the shares have been highly shorted), as it faces challenging headwinds from struggling hospital operators, heavy debt and rising interest rates. However, there are reasons to believe these headwinds are subsiding as fundamentals improve (for example, operators are bringing down costs, reimbursement rates are increasing and debt challenges are being worked out with Prospect and Steward) and macroeconomic headwinds may be subsiding (i.e. inflation is showing signs of slowing and the fed may continue to slow its rate of interest rate hikes).
We recently wrote up this REIT in detail for our members, but the basic gist is that if you are a highly risk-averse investor, MPW is not right for you. But if you can handle the volatility, the shares are worth considering for a spot in your prudently-diversified long-term income-focused portfolio (especially considering the very low P/AFFO ratio and the very large dividend yield).
8. Gilead Sciences (GILD), 2023 Bonds, Yield: 5.0%
Gilead in a biotech company that offers a compelling yield on its common stock (currently around 3.4%), but considering the recent strong performance of those shares and the rich valuation, we like the bonds more than the stock. Specifically, the September 2023 bonds are rated investment grade and offer an annualized yield of 5.0%, and that is an amzing increase versus one year ago (as you can see in the chart below) as interest rates have been rising sharply.
In particular, the bonds trade below par—so you’ll get some price appreciation in addition to coupon payment. Gilead is an extremely profitable business (thanks to its HIV drugs), but the pipeline is lackluster, and this is why we prefer these bonds that offer an attractive yield and mature in less than a year. Moreover, if you are uncomfortable with all the near-term volatility in the stock market, these income-producing bonds are highly attractive.
7. GSK, formerly GlaxoSmithKline, (GSK), Yield: 4.7%
Based in the UK, GSK is a pharmaceuticals company (they create, discover, develop, manufacture and market pharmaceutical products, vaccines, over-the-counter medicines, and health-related consumer products). And GSK is currently attractive for a variety of reasons, including its high profitability (35.7% net margin), low valuation (9.6x forward p/e) and outsized dividend yield, as you can see in our earlier table. The shares have been pressured lower by Zantac litigation risks, but those concerns continue to lift.
Further, GSK has attractive mid to long-term growth ahead related to its respiratory and HIV drugs, and its strong late stage pipeline. Further, its large scale, powerful distribution network and patent protections continue to give it competitive advantages and pricing power. If you are looking for a healthy dividend and potential share price appreciation, GSK is attractive and worth considering.
6. Gabelli Healthcare & Wellness (GRX), Yield: 5.9%
Another closed-end fund (this one managed by Greenwich, Connecticut-based GAMCO), GRX offers a variety of attractive qualities. For starters it’s focused on healthcare stocks (it recently held 174 positions, including names like CVS Heath Corp (CVS), Johnson & Johnson (JNJ) and AbbVie (ABBV)), it offers a big quarterly distribution (that has been steadily increasing) and it trades at an attractively large discount to NAV (recently ~13.7%).
This fund is also interesting because it uses a healthy amount of leverage (or borrowed money) recently ~28.3%. Leverage can help magnify the distribution payments to investors, but it also introduces risks and opportunities. For example, leverage can magnify price loses in the bad times, but also magnify price gains in the good times.
Also important to note, this fund has recently been sourcing its distributions from income on its underlying holdings (and not necessarily capital gains or return of capital). Some return of capital can be acceptable from time to time, but it is important for investors to note that ROC can reduce your investment cost basis thereby resulting in some unexpected gains if/when you do eventually sell shares. The total expense ratio on this fund is a little higher also because of the cost of borrowing.
Overall, if you are an income-focused investor that likes long-term gains and discounted prices, GRX is worth considering.
The Top 5:
Our top 5 big-yield healthcare opportunities are reserved for members only and they can be accessed here. The top 5 includes healthcare stocks, CEFs, bonds and REITs for you to consider. They are all highly compelling in our view. If you are not already a member, you can get instant access here.
The Bottom Line:
Performance within the healthcare sector has been wide ranging. However, select attractive opportunities are available, as described in this report (and depending on your own personal situation and needs).
Not only do many healthcare opportunities have less downside risk and plenty of long-term price appreciation potential, but they also offer big yields that can help many investors psychologically weather any near-term price volatility. Disciplined, goal-focused, long-term investing is a winning strategy.