3 Dividend Stocks for Next Quarter

GlaxoSmithKline (GSK), Merck (MRK), and Quest DIagnositcs (DGX) not only offer compelling dividend yields but also a strong history of shareholder-friendly returns next quarter.

Mar 30, 2014 at 8:00PM

Rocky markets can take a toll on even the most stalwart investor, but selling dividend-paying companies into weakness isn't your best bet. In the past, dividend investors have been much better served by taking a long view that allows dividends to offset Wall Street's whims and whispers.

That could be particularly true for these three dividend-paying health-care companies: GlaxoSmithKline (NYSE:GSK), Merck (NYSE:MRK), and Quest Diagnostics (NYSE:DGX). They not only pay healthy dividend yields that can blunt the pain of a sell-off, but they're also strong performers during the coming quarter. That suggests investors may not want to sell them, and investors who have been considering them may want to step in and buy them.

GSK Chart

Source: YCharts.

The strongest dividend
GlaxoSmithKline's product lineup includes the most successful asthma medication on the market. Advair is not only among the mostly widely used drugs for treating asthma, but it's also a major moneymaker. The drug posted global sales of more than $8 billion last year, but it's not the only asthma drug in GlaxoSmithKline's catalog. GlaxoSmithKline also markets blockbusters Flovent and Ventolin. Those three drugs notched nearly $12 billion in sales from respiratory therapies last year. That market-leading position should be stronger this year given the FDA approved two more potential respiratory blockbusters last year. Those two drugs, Breo Ellipta and Anoro Ellipta, are used to treat chronic obstructive pulmonary disease and analysts project the two could eventually generate a combined $2.7 billion in peak annual sales.

Although important, asthma and COPD drugs aren't the only products propping up the company's sales. Glaxo delivered more than $42 billion in revenue last year and nearly $9 billion in profit after taxes, thanks to drugs designed to treat a variety of diseases including cancer and cardiovascular disease. The company also has an $8 billion consumer health-care business. Those are all good reasons to take a chance on its shares, but for those requiring another reason to step in during a rough-and-tumble tape, GlaxoSmithKline's shares have managed to climb in eight of the past 10 second quarters, producing an average 4.8% return. Importantly, GlaxoSmithKline's forward dividend yield is 5.7%, which means that even if shares do fall next quarter, its dividend will help ease any pain.

Quickly recovering
The patent cliff took a toll on Merck's top line when its top-selling asthma drug Singulair lost patent exclusivity in 2012. Merck also lost protection on Temodar and Maxalt last year, threatening another $1.5 billion in sales. However, it's not all bleak for Merck given the company still expects sales of $42 billion to $43 billion and earnings of $3.35 to $3.53 this year. While that's down from the $44 billion and $3.49 per share recorded last year, Merck's future may brighten thanks to promising cancer drug MK-3475. Strong performance in trials as a melanoma treatment and FDA breakthrough status has investors hoping for a quick and easy path to approval. The drug may also offer opportunity as a therapy for non-small cell lung cancer. In addition to MK-3475, Merck also has late-stage studies under way in ovarian cancer, diabetes, psoriasis, and Alzheimer's disease.

Those opportunities could put Merck back on a path to sales and profit growth, but for investors needing an extra push toward owning shares, it's worth noting that Merck has also gained in eight of the past 10 second quarters, posting a nearly identical 4.8% average return to GlaxoSmithKline. It's even less correlated to the S&P 500 than GlaxoSmithKline at 0.48 for the period, which means that even if markets fall, its shares may not. If Merck's shares do drop, the company pays a 3.2% forward dividend yield that may help offset any weakness.

Greater volatility, but strong cash flow
Quest Diagnostics is a Goliath in lab testing, operating 2,100 testing centers nationwide. The company, which generated $1.7 billion in fourth-quarter sales, hopes to expand its diagnostics business into personalized medicine. Last year, Quest launched a BRCA gene test for breast cancer patients in a bid to win business from Myriad Genetics.

Additionally, Quest is in the midst of a restructuring that it hopes will save it $500 million in annual costs. If so, the company's solid cash stream, which helped Quest repurchase $1 billion in shares last year, should continue to reward investors. It is guiding investors to expect $900 million in cash from operations and $3.90 to $4.10 in earnings per share this year. That cash flow and solid earnings outlook should provide investors with a healthy dose of stability, but for those wondering if headwinds will be too strong this spring, shares have also been solid performers in the second quarter. Over the last 10 years, shares are up eight times, producing an average 4.6% return. Investors should also know that Quest does have the highest standard deviation of these three companies for the period, which means it may be more volatile, and the highest correlation to the market of the three, which means it's most likely to follow the market's path. Regardless, its 2.4% forward dividend yield appears rock-solid given its cash flow.

Fool-worthy final thoughts
Investors shouldn't be jumping in an out of stocks based on emotion. Instead, taking a calculated approach can produce impressive returns over time, especially for dividend-paying companies. GlaxoSmithKline and Merck aren't free of business challenges, but they're both large drug developers with a proven history of creating innovative and dividend-friendly therapies. If big pharma isn't on your dividend wishlist, lab testing giant Quest may fit the bill given a larger, longer living population is likely to increase rather than decrease testing demand over the coming decade.

Here are nine more dividend companies you ought to know about
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Todd Campbell has no position in any stocks mentioned. He owns institutional research firm E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC, whose clients do not have positions in the companies mentioned. The Motley Fool recommends Quest Diagnostics. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers