Over the long run, the best-performing investment portfolios are often those that are loaded with dividend stocks. There are, in particular, four reasons why dividend stocks are in such high demand among long-term investors.
Why dividend stocks are usually the stars of your portfolio
To begin with, dividend stocks have handily outperformed non-dividend paying companies over the long term. The data shows that if you buy high-quality income stocks and hang on to them for a long period of time, you'll probably do better than if you purchased companies that don't pay a dividend.
Image source: Getty Images.
Second, recurring dividends are generally only paid by companies that have a time-tested business model. If the management team of a company didn't believe that its business would grow, it probably wouldn't be sharing a percentage of its profits with shareholders.
Third, dividends can relieve some of the stress associated with inevitable stock market corrections. Although dividend payouts are highly unlikely to hedge against the entirety of a stock market correction, they can calm the nerves of investors and keep them from making rash mistakes, such as panic-selling a stock despite its investment thesis still being intact.
And finally, dividend stocks often allow investors to participate in a dividend reinvestment plan, or Drip. A Drip can allow your payout to be automatically reinvested into more shares of dividend-paying stock, creating a pattern of compounding growth whereby your dividends and share ownership increase over time. Drips are a commonly used strategy of the best money managers to create wealth for their clients.
These biotech stocks have above-average dividend yields
One industry that isn't very well-known for dividend payments is biotech. In fact, Finviz lists just four dividend-paying stocks throughout all of the publicly traded biotech industry, meaning 99% of biotech stocks do not pay a dividend. This isn't all too surprising given that around 90% of biotech stocks are losing money, and many are focused on pouring cash into their drug development pipelines or small product portfolios. Generally, investors are looking to biotech stocks for growth, not income.
Image source: Getty Images.
But what if you could have both? A quick screen of the biotech industry turned up two stocks that are currently paying out a higher dividend yield than the average yield of the broad-based S&P 500 (^GSPC -0.88%) (1.91%). That's the opportunity for growth, income, and business model stability, all rolled up into one. Let's take a look at these two biotech stocks.
Amgen
Not surprisingly, the highest-yielding biotech stock is the original biotech blue chip, Amgen (AMGN 2.35%). Amgen, which is currently yielding 2.6%, has been paying out a quarterly dividend since the summer of 2011. Over the past six years, its quarterly payout has more than quadrupled to $1.15 a share from $0.28 a share.
What's the secret formula that's allowed Amgen to deliver such a healthy dividend to long-term investors? It's a combination of strong existing product performance, a healthy pipeline, and cost controls.
Though it's lost a lot of its recent pricing power on Enbrel, price hikes to the tune of 20% per year had been fueling growth in Amgen's largest drug by sales for years. Even with a 1% sales decline in the second quarter, primarily a result of tougher competition in the autoimmune disease space, Enbrel is still on track to near $6 billion in annual sales in 2017.
Multiple myeloma drug Kyprolis, which was acquired when Amgen purchased Onyx Pharmaceuticals in 2013, has been another shining star, with growth of 23% from the prior year in the second quarter. Between price hikes, growing demand, and possible label expansion opportunities, Kyprolis could soon be knocking on the door of $1 billion in annual sales.
Image source: Getty Images.
In terms of innovation, Amgen brought around a half-dozen new therapies to market since December 2014, including a completely new therapeutic focus on cardiovascular drugs. Next-generation cholesterol-lowering injection Repatha witnessed its sales more than triple to $83 million in the second quarter from $27 million in the previous year, with aspirations of hitting $1 billion or more in annual sales still well within reach.
Amgen has also not been afraid to trim the fat. In response to its multiple drug launches beginning in late 2014, the company cut 4,000 jobs, or about 20% of its workforce, to save around $1.5 billion annually. This money wasn't truly "saved" so much as redirected to marketing, drug launches, and phase 3 study costs at the time.
Overall, we have a company that's moved its operating margins from the high-30% range to the low- to mid-50% range in a few years, and it's allowed for healthy dividend growth and a superior yield.
Gilead Sciences
The only other income star within the biotech industry that has an above-average yield relative to the S&P 500 is Gilead Sciences (GILD 0.91%). Cash flow king Gilead is currently paying out a 2.5% yield, and it's consistently paid a stipend every quarter since June 2015.
Gilead's success has boiled down to its two primary therapeutic focuses: hepatitis C and HIV. However, as you'll see below, it recently added a third area of focus this past week.
Image source: Getty Images.
Gilead's true claim to fame are its oral hepatitis C virus (HCV) pills, Sovaldi, Harvoni, and Epclusa. Sovaldi and Harvoni, in particular, were a first-in-class once-daily oral HCV regimen that provided a safe and effective cure for the disease for a vast majority of patients. Since these were such game-changing drugs, Sovaldi and Harvoni also came with huge list prices that translated into mountains of cash flow for Gilead. Although the company has "hit the low-hanging fruit" by treating the sickest patients in the U.S., there are still an estimated 180 million people worldwide with HCV, giving Gilead plenty of runway left to profit from its HCV product portfolio.
However, with no cure for HIV in clear sight, Gilead's portfolio of around a half-dozen HIV-fighting therapies should continue to grow by a double-digit percentage. Next-generation HIV therapies like Genvoya, Descovy, and Odefsey have grown by leaps and bounds on an annual basis, replacing some of Gilead's older HIV drugs, such as Stribild and Atripla, which have seen double-digit sales declines in 2017. This trade-off is fine by Gilead as it keeps patients within the same portfolio, and it likely comes with higher margins.
Last week, Gilead also announced that it was paying a nearly 30% premium to acquire next-generation cancer drug developer Kite Pharma (NASDAQ: KITE) for $11.9 billion in cash. Kite Pharma is at the forefront of chimeric antigen receptor T-cell therapy (CAR-T), which involves harvesting a patient's T-cells, modifying them for a particular cancer, replicating them, then reinjecting them into the patient. The idea being that CAR-T therapy can boost a patient's immune system to better recognize and fight cancer, thus improving response rates and effectiveness. Considering that Gilead is swimming in cash flow and that its internal oncology program failed to deliver, this was an almost expected move.
If Gilead can successfully build this third area of focus in oncology, then growth and income investors will be happy campers.
