If you're looking for a stock to outperform the broad market, CVS Health (CVS -0.04%) is an excellent choice. Integrating pharmacy benefit management services with its enormous retail pharmacy chain has helped the stock rise over 158% over the past decade, beating the S&P 500 benchmark of about 78% over that period by a mile.
From an income investor's standpoint, however, a dividend yield of just 1.8% isn't nearly as eye-popping as the stock's recent rise. Luckily there are several healthcare-related stocks that offer much better yields. Johnson & Johnson (JNJ -0.04%) and Gilead Sciences (GILD -0.72%) are very different companies with two things in common: They offer bigger dividend yields than CVS Health and they benefit from the secular trend of rising healthcare needs as populations age.
Let's see if one might fit into your income portfolio.
Johnson & Johnson practically created the consumer healthcare industry in the late 19th century with brands that continue to thrive. It has steadily expanded from consumer goods to medical devices and pharmaceuticals, outpacing the S&P 500 over the past five-, 10-, and 20-year periods in the process.
Investors looking forward to retirement can rest easy knowing J&J has increased its dividend for 54 consecutive years, a track record that only 10 companies on U.S. exchanges can beat. The current quarterly dividend of $0.80 offers an annual yield of about 2.7% at recent prices, and the distribution is well funded. Over the trailing 12 months, dividend payments required a sustainable 59% of the free cash flow generated during the same period.
After dividend payments made over the past 12 months, the company had $5.7 billion in excess free cash flow to repurchase shares or to make smart investments in its rapidly growing pharmaceutical segment. In 2011 it paid Pharmacyclics just $150 million up front for rights to half of potential sales generated by its blood cancer candidate that later became Imbruvica. That drug has since become the first chemotherapy-free treatment option for newly diagnosed patients with the most common form of leukemia. This expansion has helped J&J's portion of Imbruvica sales more than double in the first half of the year, compared to the previous-year period, to $556 million as it surges toward peak annual estimates of $5 billion or more.
Just scratching the surface
Gilead Sciences doesn't have J&J's lengthy history, but it does have cash flows even the world's largest healthcare company might envy. Sales of its hepatitis C virus (HCV) treatments have exploded, generating $19.1 billion in revenue last year.
Thanks to its dominant HCV treatments and a stable of leading HIV antivirals and other drugs, Gilead Sciences has generated more free cash flow than J&J over the past 12 months. Rather than pursue a Pfizer-esque acquisition strategy, Gilead has been returning those profits to investors with massive share repurchases that have allowed it to raise quarterly dividends paid per share by 9.3% this year without increasing its total payout.
At recent prices, Gilead's $0.47 quarterly dividend offers a 2.4% annual yield. Granted, that isn't terribly enticing, but dividend payments chewed up just 14.4% of the company's free cash flow during the trailing-12-month period. That leaves plenty of room for big hikes in the years ahead.
The stock is trading at an insanely cheap multiple of about 6.9 times trailing earnings, largely due to fears its HCV antiviral sales will continue sliding. That's understandable, as second-quarter HCV sales of $3.92 billion were 19.9% lower than the previous-year period.
I think the company has just scratched the surface of the HCV space. An estimated 3.5 million Americans, and 180.6 million people worldwide, are infected with one of six different strains of the virus, and Gilead recently launched the first pill approved to treat them all without the need for costly viral genotyping. The vast majority of people infected with HCV in the U.S. remain untreated due to restrictions limiting access to the sickest patients. Those restrictions are rapidly easing, as plaintiffs opposing them keep winning legal battles across the country.
CVS Health is a wonderful company, with 13 consecutive years of rapid dividend increases. If you're looking for a higher yield to begin with, though, it looks like you're better off with J&J or Gilead Sciences at the moment.