Picking the best dividend stocks isn't just about finding the highest-yielding picks. Top dividend stocks mix stable, profitable companies with dividends that will pay rewards for the long run. Health care long has been a home to some of the top dividend stocks on the market, but just which ones are the best bets for your portfolio?
Over the course of this series, we've checked out how some of the top names in the industry have stacked up. Big pharma's Pfizer (NYSE:PFE) and diversified health giant Johnson & Johnson (NYSE:JNJ) have stood out as shining examples of stellar dividend stocks, but when put head to head, which one of these income investors' delights stands out as the better buy? Let's dive into the comparison.
By the numbers
Just looking at the numbers, Pfizer's yield edges out J&J's, with a 3.3% yield significantly larger than the latter's 2.8% payout. Pfizer also has a lot more room to increase its dividend, with a mere 25% dividend payout ratio. By contrast, J&J sports a 55% payout ratio -- still strong and offering plenty of space for future increases, but a number that's considerably more than Pfizer's.
However, J&J has history on its side. The company's one of the S&P 500's (SNPINDEX:^GSPC) dividend aristocrats, meaning that it's raised its dividend every year for at least the past 25 consecutive years. Pfizer, on the other hand, has raised its dividend every year only since the aftermath of the recession in 2009. Pfizer worked hard to raise its dividend before that particularly tough time for the economy, but the point goes to J&J here.
Yet it takes more than a solid dividend and a strong dividend history to decide on the best stocks for income investors. J&J and Pfizer both are top blue-chip stocks, but let's dig into the details on each of these competitors.
The drug battle
On a pharmaceutical basis, Pfizer and J&J both offer plenty to tantalize investors' pocketbooks.
J&J's pharmaceutical division is powered by star immunology drug Remicade, which has already posted sales of more than $3.2 billion in the first half of 2013. It accounted for more than 20% of the company's total pharmaceutical revenue in that time period and has boosted sales by 7.5% this year – not bad for one of the world's top-selling blockbuster drugs.
Remicade might be J&J's best drug, but it's hardly its only one. Cancer-fighting Zytiga and Velcade both are on pace to hit blockbuster status by the year's end, with each exceeding the $700 million revenue mark over the first six months of 2013. Zytiga in particular has raked in the green during its short life: The drug grew sales year-over-year by more than 70% over the year's first half. Overall, J&J's pharmaceutical division pulled in double-digit percentage revenue growth in the first six months of 2013.
Remicade has several years before losing patent protection, but J&J investors need to watch the company's pipeline and rising stars to ensure that the company has a plan for the future. The firm's newly approved diabetes drug Invokana should perform well with its multibillion-dollar peak sales projections. J&J also has 10 new drugs that it plans to file for regulatory approval between this year and 2017. It's safe to say that the company has established a clear road to a bright pharmaceutical future – and a secure future is a big plus for stability-minded income investors.
Pfizer's no slouch by comparison. The company's downsized by shedding its non-core divisions such as its animal health business and infant nutrition business, but its branded pharmaceutical segment still is flying high at full speed. The company's been losing sales lately due to star blockbuster drug Lipitor's patent expiration last year. Still, Pfizer posted 10 drugs that sold a billion dollars or more last year, including Lipitor. Strong products like Lyrica and Enbrel are making the patent expiration of one of the top-selling drugs of all time a little easier to handle.
Pfizer also has a robust pipeline supporting a promising future. As of May 9, the company had 18 drugs in phase 3 trials and another six under regulatory review. Some of Pfizer's 50 drugs in early to-mid-stage trials will progress to later stages as well, making the future of the firm's pharmaceutical portfolio inviting, indeed.
J&J breaks through
However, it's when we look beyond the two firms' pharmaceutical branches that the real separation begins.
You can't call Johnson & Johnson weak on diversity. The firm's medical device segment's sales exceeded its pharmaceutical revenue over the year's first half, and its consumer segment -- while slow-growing -- still packs a financial punch. For a dividend investor, broad diversity like this offers the kind of stability that makes J&J's future look all the more secure.
Pfizer isn't in bad shape by any means, but the firm's pharmaceutical division is all there is. Even the company's generic drug business may soon be the latest victim of the company's divestment streak, as Pfizer recently reorganized to separate its generic drugs and those branded products soon to lose patent protection into their own division. That could be the precursor to another spinoff or sale, especially as Wall Street types have clamored for the company to return more value to shareholders through such a breakup.
Maybe that strategy will return more value to investors now, but in the long run, Pfizer likely will experience more volatility due to the boom-and-bust potential of the pharmaceutical industry. J&J's strength across the entire health care sector ensures that while the firm may not reap all the benefits of a breakthrough drug, it'll be able to withstand the kind of patent losses that have hit Pfizer and its fellow big pharma rivals.
To income investors, that resilience is a key differentiator. Pfizer's a top stock in big pharma, but it's hard to beat J&J's dominance of this sector. Johnson & Johnson's combination of steady dividend increases, an attractive yield, and an unbeatable business make it one health care stock that dividend investors can't afford to pass up.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.