1 Great Dividend You Can Buy Right Now

Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.

Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.

This week, I want to step into the health-care arena and highlight a behemoth in Merck (NYSE: MRK  ) .

The dreaded patent cliff
I've been notably harsh on drug makers over the past year, as many are facing patent cliffs where there may be no viable return. Forest Laboratories (NYSE: FRX  ) , for instance, saw sales of its blockbuster antidepressant Lexapro dive into the abyss, down 93%, to just $44.7 million from $596.1 million in the year-ago period because of heavier-than-expected generic competition. Worse yet, its Alzheimer's treatment, Namenda, which accounted for 53% of all revenue last quarter, will lose patent protection in 2015.

Looking at a bigger pharmaceutical company, Pfizer (NYSE: PFE  ) is also having all sorts of issues. It recently lost exclusivity on Xaladan, the previously best-selling drug in the world, Lipitor, Geodon, and Detrol. Pfizer's doing what it can to attempt to make up for these billions in lost revenue, but as we recently saw with experimental Alzheimer's treatment bapineuzumab, which was developed in collaboration with Johnson & Johnson (NYSE: JNJ  ) , not everything will be a success.

Turning to acquisitions isn't always the best course of action, either, for big pharmaceutical companies. Bristol-Myers Squibb's (NYSE: BMY  ) overzealous purchase of Inhibitex for $2.5 billion to get its hands on the company's early stage hepatitis-C drug turned into a fat $1.8 billion writedown after safety concerns completely halted the drug's development. 

Say hello to organic growth
That leads us back to Merck, one of the few big pharmaceutical companies capable of growing its pipeline organically. Merck isn't completely spared from the wave of patent expirations sweeping through the sector -- it lost its exclusivity on asthma treatment Singulair this year (11% of total revenue) -- but relative to its peers, Merck shareholders have little to worry about for quite a long time.

Leading the charge within Merck's pipeline is its dynamic diabetes duo of Januvia and Janumet. These caped crusaders saw combined sales grow 15% to $1.4 billion in the third quarter, and should see consistent growth considering the rise in obesity within the United States. Gardisil, which treats four types of the human papillomavirus, also saw sales spike higher by 31% in the third quarter as it benefited from higher sales abroad. Shingles vaccine Zostavax also looks like it could be a blockbuster in the making. Sales of the drug grew a whopping 87% to $202 million in the latest quarter as an increase in supply and advertising within the U.S. helped spark demand for the vaccine.  

Merck is also much more than just its product portfolio. Its pipeline is rich with potential blockbusters, of which experimental osteoporosis treatment odanacatib is, without question, the most important. Late-stage fracture risk trials of odanacatib were actually stopped early as outside monitors noted just how effective the drug was in reducing fractures. Furthermore, odanacatib has an excellent tolerability profile, which should make it the drug of choice for the roughly one-quarter of osteoporosis suffers who can't take bisphosphonates. With analysts pegging peak sales estimates of the drug around $3 billion and a new drug application submission expected within the first half of 2013, Merck shareholders have plenty of organic growth still on the way. 

One healthy payment
However, the one drug that seems to have an immaculate cure rate is Merck's dividend. Prescribed on a quarterly basis, this "miracle cure" since as far back as 1970, has never given shareholders a quarter-over-quarter drop in payout. Note, that doesn't mean that Merck raises its dividend every year, but shareholders have never seen that payout drop, period!


Source: Merck investor relations.

As you can see, Merck's dividend is one of the most consistent around. Its payout has nearly quadrupled in the past 20 years and it shows little signs of slowing – even with the loss of Singulair. What's more, Merck's payout ratio is just 44% of expected 2012 EPS. This means that not only is the company's payout reasonably safe, but future dividend increases appear likely.

Foolish roundup
It might be hard to believe given the growing pains we've witnessed in the pharmaceutical sector, but Merck has all the right tools to be a powerful curing agent for your portfolio. It offers both a powerful existing pipeline, as well as a bounty of new drug hopefuls that will make Singulair sales a distant afterthought. In addition, Merck's dividend is unrivaled by few companies in the health-care sector. Paying out nearly 4% in yield, Merck looks poised to continue its dominance for years to come.

If you want an even more in-depth look at the opportunities and threats facing Merck, then you need to get your very own copy of our latest premium research report on Merck. Complete with a year of regular updates, this deep dive into Merck is just what the long-term investor ordered. Click here to learn more.


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