Just two weeks ago I encouraged health-care sector income investors to take a step back and evaluate the quality of dividends they were receiving. While it's not as if big pharma is twiddling its thumbs while paying out hefty dividends, it's sometimes a bit of a head-scratcher why big pharma dividends are moving higher while top-line sales are generally heading lower. In essence, I'd rather see growth stability long before seeing a higher dividend payout.
Another point of contention is the simple fact that the health-care sector is home to more than 600 companies, yet only 80 have paid a dividend over the trailing 12 months (and this includes special non-recurring dividends, too!). Furthermore, just 33 of these companies pay a respectable yield of 2% or more (usually the level where income-seeking investors become interested). In other words, it's not easy to attract income-seekers to the sector, which is one reason why long-term buy and hold investing is a rarity among health-care stocks, and why we see such wild volatility and price swings so often.
However, I've sat down and compiled a fictitious portfolio containing five health-care focused stocks that would keep you diversified within the sector and could, assuming their prices and payout remained static, net you a 4.2% annual yield.
Let me introduce you to the five companies I selected that could help you achieved a greater than 4% yield in the health care sector.
GlaxoSmithKline (NYSE:GSK): yield 4.6%
If you want a big pharma with a lot going its way, then GlaxoSmithKline could be the company for you. GlaxoSmithKline hasn't had just one or two good things go its way, but a handful over the trailing 12 months. As I'll describe in more detail below, it and development partner Theravance had both inhaled long-term maintenance COPD therapies Anoro Ellipta and Breo Ellipta approved by the Food and Drug Administration, Mekinist and Tafinlar were approved as monotherapies in 2013 and as a combination therapy for metastatic melanoma earlier this year , and in April Glaxo received FDA approval for its once-weekly type 2 diabetes therapy Tanzeum ... just to name a few approvals. Further, it'll be years before a biosimilar of Seretide (Advair) hits the market, meaning plenty of sustainable cash flow for Glaxo to maintain or boost its ever-changing payout.
Johnson & Johnson (NYSE:JNJ): yield 2.8%
There are few safer dividends around than conglomerate Johnson & Johnson which has boosted its payout in 52 consecutive years. If that weren't enough for an automatic inclusion for J&J, consider that its nearly $20 billion purchase of Synthes in 2012 gave it expanded exposure to rapidly growing emerging markets, while still allowing investors to benefit from its personal product, medical device, and branded pharmaceuticals portfolio. Because of its sector and geographical diversity it's able to cope with most industry and economic downturns better than its peers, setting up investors for more restful nights of sleep.
Health Care REIT (NYSE:HCN): yield 4.9%
With the Affordable Care Act altering the health-care landscape and likely boosting the need for hospitals, senior housing, and outpatient facilities, it only makes sense to include Health Care REIT, an owner of more than 1,200 health care properties, including hospitals and senior housing facilities, across 46 U.S. states, Canada and the U.K. As the rate of uninsured persons continues to fall my guess would be that physician demand will increase, only reinforcing Health Care REIT's ability to boost rental prices for health-care companies, and encouraging it to purchase even more property. Plus, an aging baby boomer population is likely to increase the need for senior housing needs moving forward. With a raised funds from operations full-year forecast in the first quarter, I'd certainly suggest its nearly 5% payout looks safe for the time being.
Theravance (NASDAQ:THRX): yield 3.5%
In addition to having its partnered COPD compounds, Anoro Ellipta and Breo Ellipta, approved by the FDA, Theravance announced last year after a strategic review that it was going to split into two separate companies – a Royalty Management Co. comprised of its partnered COPD assets, and Theravance BioPharma, its clinical discovery company made up of its other assets. In its first-quarter results released last week Theravance announced that it'd begin paying a $0.25/quarter dividend from Royalty Management Co. beginning in the third quarter. Based on its current price that's a 3.5% yield, but once the spinoff is enacted the yield on this group of five stocks (assuming you wait until the actual spinoff on June 2 and purchase only Royalty Management Co.) could be higher. With a handful of partnered compounds still being studied, and both FDA-approved long-term maintenance therapies expected to bring in north of $1 billion in annual peak sales, this dividend could become quite lucrative for income seekers.
PetMed Express (NASDAQ:PETS): yield 5.3%
Lastly, what better way to cash in on the growth in household pets and their increasing acceptance into our families than with online prescription and non-prescription pet medication and supplement website 1-800-PetMeds, owned by PetMed Express. PetMed Express has always been one to give back to shareholders and has regularly maintained a yield of 4% or greater. As a pet owner myself I can vouch that I'd pay almost anything to ensure the health of my pets, which when combined with higher pet ownership rates should equal long-term success for PetMed Express.
Averaged out, an equal weighting in these five health-care stocks would net you a 4.2% yield as of their closing prices on May 14. And, as I mentioned above, this yield could be significantly higher if you simply wait a little more than two weeks until Theravance BioPharma is spun off. Income-seeking investors can prosper in the health-care sector; they just have to know where to look!
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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