It makes a lot of sense for income-focused investors to look beyond simply the current dividend yield and to also consider profitability and growth. In this report, we share data on 25 big-dividend healthcare stocks, including also data on earnings and revenue growth. We then highlight a few names from the list that we believe are particularly attractive and worth considering for investment—if you are a long-term income-focused investor.
25 Big-Dividend Healthcare Stocks.
Income-focused investors don’t always think of healthcare stocks, but as you can see in the following table, the sector offers a variety of high yields. And if you are a long-term investor, it make a lot of sense to look beyond simply current yield (and even dividend coverage ratio, for that matter), and to instead consider health of the total company.
AbbVie (ABBV), Yield: 4.4%
Some investors are nervous about the very strong share-price performance of AbbVie over the last two years (see table above). However, AbbVie is profitable, growing and the dividend is well-covered; these are three things you like to see if you are an income-focused investor. Next, on a forward P/E basis, the shares are quite reasonably price (see table above).
AbbVie discovers, develops, manufactures, and sells pharmaceuticals worldwide. At roughly 40% of revenue, AbbVie’s largest drug is HUMIRA (a therapy administered as an injection for autoimmune and intestinal Behçet's diseases). However, the company does have a strong portfolio of additional marketed and pipeline drugs, plus the recent acquisition of Allergan (which many believe was undervalued) helps diversify the reliance on HUMIRA. In particular, HUMIRA profits are expected to slow starting in 2023 (due to patents), and we believe the company’s other drugs (including the Allergan acquisition) will help the company remain healthy.
Overall, we view AbbVie as a continuing standout opportunity for long-term income-focused investors. We currently own shares of AbbVie.
Merck (MRK), Yield: 3.3%
Merck offers a healthy dividend payment that has been increased for more than 10 consecutive years. And despite this year’s weak performance for the share price, the company’s earnings-per-share is expected to grow at a healthy clip (12.8%) over the next 5 years (see table above). It also trades at a reasonable forward price-to-earnings ratio.
Aside from financial metrics, Merck also has a lot of attractive fundamental aspects to its business. For starters, the company enjoys large economies of scale (to strengthen margins and maintain R&D). The company also has an attractive combination of high-margin drugs and a healthy pipeline. For example, Keytruda (the company’s largest drug, accounting for more than a third of total sales) recently posted strong operational growth (+20%).
We also really like that Merck is on track for a strong post-pandemic recovery. Compared to other drug companies, Merck has a higher percentage of hospital-administered drugs, and considering people have avoided the hospital during covid, the business took a harder hit, but is now on track for a stronger recovery. For example, BRIDON and PREVYMIS both are experiencing very strong year over year upticks—a very good thing for Merck.
Additionally, we like that Merck divested of Organon in June of this year, leaving a remaining portfolio with stronger patent protection.
Overall, we view Merck as attractive, and a bit of a contrarian play (it’s unfairly lagging the market this year). If you like big steady growing dividends, and the potential for attractive share price appreciation, Merck is worth considering for a spot in your income-focused portfolio.
Johnson & Johnson (JNJ), Yield: 2.4%
You may be turned off by JNJ’s relatively small 2.4% dividend yield, but don’t be. This is a perennial dividend-growth powerhouse. It has raised its dividend for over 50 consecutive years, and the share price continues to march higher. From a fundamentals standpoint, revenues and earnings per share are both expected to keep growing in the years ahead and at a rate that is faster than most of its smaller healthcare sector peers.
JNJ’s operates through three segments, including Consumer Health, Pharmaceutical, and Medical Devices. The Consumer Health segment offers baby care products, oral care products (e.g. Listerine), skin health/beauty products, acetaminophen products (e.g. Tylenol), cold, flu, and allergy products, and many many others. The pharmaceutical segment offers products in various therapeutic areas (including immunology, infectious diseases, neuroscience, oncology, pulmonary hypertension, and cardiovascular and metabolic diseases). And the Medical Devices segment provides products to treat cariovascual diseases, as well as treating hips, knees, trauma, spine, sports, and others, to name a few.
We currently own shares of Johnson & Johnson, and we ranked it highly on our recent report: Top 10 Dividend Growth Stocks.
The Bottom Line
Overall, the healthcare sector offers a variety of healthcare opportunities, particularly in big pharma. However, investors should be cautious to not simply chase after the highest yields, but instead to look under the hoods at the underlying businesses. For example, many pharma companies are able to pay big dividends now because they have some highly profitable blockbuster drug that will unfortunately lose patent protection in the near future—and the dividend will quickly become not so safe (unless the company can find a way to replace the lost revenue).
Furthermore, investors should look at the growth potential of the businesses too. Because what good is a big dividend if it is more than offset by a declining share price?
The three opportunities we have highlighted in this report are all attractive for the healthy dividends and long-term share price appreciation potential. We currently own AbbVie and Johnson & Johnson, and Merck is currently very tempting as a contrarian play.
The bottom line is simply that if you like healthy growing income, the healthcare sector is ripe with select attractive opportunities. But before you buy or sell anything, make sure it is consistent with your own personal investment goals and it fits prudently into your overall investment portfolio.