If you don't have an individual retirement account (IRA), get one. They provide a great option for accumulating retirement savings on a tax-deferred basis. And with a Roth IRA, you won't have to pay taxes on any of your gains along the way.
But how should you invest the money you put into an IRA? For retirement accounts, it's important to choose a variety of stocks that are well positioned for success over the long haul. Here are three key reasons why I think AbbVie (ABBV 1.13%) is the top stock you should consider adding to your IRA.
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1. Dividends
Dividend stocks are often smart choices for investors. And the smartest investors put dividend stocks in their IRAs first before owning them in fully taxable accounts. Why? Unlike capital gains, which are only taxable when you sell a stock, Uncle Sam will want his share of your dividend payments every year. But if the dividends are paid into a traditional IRA, you can defer that tax bill. And if you have a Roth IRA, you won't pay any taxes on those dividend payments in retirement.
All this is very pertinent for AbbVie, because the big biotech pays out a very nice dividend. AbbVie's dividend currently yields 3.6%, among the highest in the healthcare industry. That dividend seems likely to grow in the future for a couple of reasons.
First, AbbVie's commitment to paying out dividends is exemplary. The company belongs to an elite group of stocks known as Dividend Aristocrats. The minimum requirement for inclusion in this group is 25 consecutive years of dividend increases. AbbVie has increased its dividend for 45 years in a row, counting the period that it was part of Abbott Laboratories.
Second, AbbVie has plenty of flexibility to increase its dividend payout. The biotech currently uses less than 61% of earnings to fund the dividend program. Even if its earnings remain stagnant, AbbVie shouldn't have any problem with dividend hikes down the road.
2. Growth
Even better news for investors is that AbbVie's earnings are likely to grow -- a lot. Wall Street analysts project the company will grow earnings by an average annual rate of nearly 14.5% over the next five years.
AbbVie's autoimmune disease drug Humira continues to perform admirably. It's not just the company's top-selling drug -- Humira has been the No. 1 drug in the world for the last few years.
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There are several other up-and-coming stars for AbbVie as well. Imbruvica is already a huge success and is projected to rank among the top five cancer drugs in the world by 2022. AbbVie also recently won European and U.S. approval for its pan-genotypic hepatitis C drug Maviret, which could position it to finally start stealing hep C market share.
The company also claims a strong pipeline that market research firm EvaluatePharma ranks as the third-best in the biopharmaceutical industry. AbbVie's pipeline candidates include potential blockbusters Elagolix, which targets treatment of endometriosis and uterine fibroids, as well as lung cancer drug Rova-T.
3. Value
With its great dividend and tremendous growth prospects, you might think that AbbVie stock would be priced to perfection. But it's not. AbbVie shares currently trade at around 12 times expected earnings.
Of course, any time you see something seemingly priced below what it's worth, it's smart to ask why that's the case. For AbbVie, concerns about the potential for competition for Humira have held the stock's valuation down. Amgen won U.S. approval last year for Amjevita, a biosimilar to Humira.
AbbVie's management team, however, thinks that it will be able to fend off biosimilar rivals in the U.S. through 2022. The company is defending its 61 patents for Humira in a legal dispute with Amgen. That trial doesn't begin until November 2019.
Of course, sooner or later Humira will face stiff competition. Even then, though, sales won't dry up overnight. That should give AbbVie plenty of time to roll out its experimental drugs currently in the pipeline, which include promising autoimmune disease candidates risankizumab and upadacitinib.
