4 Tempting Health-Care Dividend Stocks to Avoid

When screening for health-care dividend stocks, it's tempting to look for the ones with the highest yield. On the surface, larger dividend payments are better than smaller ones.

All things being equal that's true. But when it comes to dividend stocks, all things are rarely equal.

For instance, I did a screen for health-care dividend stocks; here are the ones with the largest yields.

Company

Dividend Yield

AstraZeneca (NYSE: AZN  )

7.9%

PDL Biopharma (NASDAQ: PDLI  )

7.8%

GlaxoSmithKline (NYSE: GSK  )

4.4%

Eli Lilly (NYSE: LLY  )

3.9%

Source: Motley Fool CAPS.

A lesson about screeners
That AstraZeneca dividend yield looks really juicy, but it'll leave a bad taste in your mouth. It's not real.

Computers aren't very good at calculating exceptions, and AstaZeneca's dividend is far from normal. The company typically pays out a large dividend in February and a smaller dividend in August. Last year, the dividends were $1.95 and $0.90. The year before they were $1.85 and $0.85.

It appears the screener -- and a few quotes pages I looked at -- are taking the $1.90 dividend from February and doubling it to get the yield. But based on history, investors shouldn't expect another $1.90 payment this year.

Using the last two payments, we get a yield of 5.9%. Still pretty juicy, although I wouldn't recommend buying AstraZeneca for the dividend.

In fact, I wouldn't recommend buying any of those pharma dividend stocks
There's a reason AstraZeneca, Glaxo, and Eli Lilly have such high dividend yields. Their growth potential is severely limited. It's a bad combination of meager pipelines and top-selling drugs facing generic competition -- AstraZeneca is dependent on Crestor, Glaxo will lose Avodart in a couple of years, and Lilly will lose Humalog and Cymbalta this year.

It's tempting to say the dividend is sufficient to justify owning the stock, especially at the current Treasury yield. The difference is Treasuries aren't going to lose value; these dividend stocks could fall further.

The dividend yield should, in theory, provide some price support, because as the price falls, the yield goes even higher, making it more tempting to purchase. But investors should realize that threshold can be relatively high for pharma dividend stocks. Pfizer's yield hit 7.3% before it bought Wyeth and managed to maneuver through Lipitor's patent expiration.

The lone wolf
That dividend yield on PDL Biopharma is real. It's offered a $0.15 dividend for the past 10 quarters in a row.

The problem is that it may not last. PDL is basically a holding company for a series of patents on monoclonal antibodies. The company collects royalties and then pays a dividend to shareholder. Those royalties are set to dry up over the next few years.

PDL has started using some of the cash to buy royalties in different drugs, which might help support a dividend. If that's your kind of business, go ahead and buy, but it's pretty easy to find dividend stocks with business models that are easier to value than PDL's.

Look for quality
Instead of looking at dividend yields, look for solid growth and income from the best in the business. Here are my choices for the top two dividend stocks in big pharma.

If you're on the lookout for high-yielding stocks outside of the health care sector, The Motley Fool's special free report "Secure Your Future With 9 Rock-Solid Dividend Stocks" outlines the Fool's favorite dependable dividend-paying stocks. Grab your free copy today by clicking here.


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