One downside to a long-lasting bull market is that the market's dividend yield declines. That's a big problem for retirees who rely on their portfolio to provide a large share of their income.
Even in today's pricey market, though, there are a few high-yield stocks still worth buying. Want proof? We asked a team of healthcare investors to highlight dividend stocks that they think are still attractively priced. Read on to see why they picked GlaxoSmithKline (NYSE:GSK), HCP (NYSE:HCP), and Pfizer (NYSE:PFE).
A Big Pharma stalwart with an enormous payout
George Budwell (GlaxoSmithKline): British pharma giant GlaxoSmithKline currently sports one of the richest dividends in the entire healthcare sector, with a yield of 4.98%. Although the company also has a trailing payout ratio exceeding 200%, implying that a dividend reduction may be forthcoming, Glaxo's new management recently reaffirmed its commitment to maintaining the company's payout at current levels through to the end of 2018. Thereafter, management plans to reassess its dividend program based on free cash flow levels.
That's great news for income-seeking investors, because Glaxo is expected to post strong single-digit top-line growth over the next five years, thanks to its rapidly expanding HIV franchise led by medicines such as Triumeq, and vaccines such as the meningitis B shot Bexsero. As a bonus, Glaxo's core respiratory franchise has been picking up in a big way lately, thanks to broader insurance coverage for key growth products such as Anoro and Breo Ellipta. In other words, Glaxo's free cash flow should significantly improve over the next two years, implying that its generous dividend program might not be scaled back all that much from current levels.
Glaxo's shares are also priced at bargain-basement levels. The company's shares, after all, are currently trading at a price-to-sales ratio of 2.47, which is unusually low for a big pharma stock. While investors are clearly worried about new competitive threats to Glaxo's all-important HIV business, this key risk factor appears to be baked into the price at this point, given its dirt-cheap valuation. So now might be a particularly good time to check out this top big pharma dividend stock.
No joke: a nearly 5% yield in the healthcare sector
Sean Williams (HCP): The healthcare sector isn't exactly known for high-yield dividend stocks, considering most cash flow is reinvested back into research and development. In fact, you don't even need two hands to count the number of healthcare companies paying a 4% or higher yield. However, one top-notch income stock that stands out in the sector is HCP.
HCP isn't a "traditional" healthcare company, in the sense that it's not a hands-on research and development company. It's actually a real estate investment trust (REIT) with a unique focus on medical office buildings, hospitals, life-science operations, and senior housing. HCP acquires buildings with the intent of leasing out its properties to healthcare companies for extended periods of time. It typically builds inflation-adjusting rent clauses into its contract that assure its rental power doesn't dip below the national inflation rate. It's a genius plan that should have HCP raking in the cash over the long run.
You see, the U.S. Census Bureau is estimating that the elderly population could nearly double from 48 million to 88 million between 2015 and 2050. Given that elderly folks are far more likely to need medical care than younger adults are, this would suggest that the demand for senior housing, life-science research, hospitals, and medical office buildings is only going to rise in the decades to come -- and with it, HCP's rental-pricing power.
What's more, HCP's 290-property portfolio is also better positioned than are the portfolios of a number of its competitors. The reason? HCP has focused a lot of its attention on the independent-living component of senior housing, which has been less affected by supply fluctuations than senior living facilities have.
There are other intangibles to like as well. REITs often lug around quite a bit of debt to finance their acquisitions, but HCP has no major maturities until 2019. It's also increased its average debt maturity to 6.2 years from 4.5 years between 2010 and the first quarter of 2017, while lowering its weighted average interest rate by about 2% to 4.1% over that same time span.
All of this translates to a company that's currently paying out a 4.9% dividend yield, which is more than double that of the S&P 500. If you're looking for solid income generation in the healthcare sector, give HCP a closer look.
A pipeline to prosperity
Brian Feroldi (Pfizer): The market largely views Pfizer as a stoggy old drugmaker whose best days are behind it. While there's no doubt that Pfizer's massive size will prevent it from producing eye-popping growth numbers from here, I think the company will still be able to crank out decent total returns for its shareholders.
What's going to continue powering the company's growth engine? In the near term, top- and bottom-line growth will be fueled by the company's next-generation crop of drugs. This list includes autoimmune-disease drugs Xeljanz and Eucrisa, cancer drugs Ibrance and Xtandi, and blood thinner Eliquis. When combined with the steady sales from its huge portfolio of legacy products, Pfizer's revenue and profits should be able to post modest overall growth from here.
Over the medium and longer term, Pfizer's investors will need the company's pipeline to do most of the heavy lifting. While investing in a company for its pipeline alone is risky, I'm comforted by the fact that Pfizer spends heavily on R&D each year and currently boasts 32 programs in late-stage development. With so many shots on goal, there are bound to be at least a few blockbusters in there, waiting in the wings.
When combining these growth engines with Pfizer's healthy share-repurchase program, Wall Street expects that the company's profits will grow by more than 5% annually over the next few years. That's not too bad for a company that sports a 3.8% dividend yield. Furthermore, a growing profit steam should help gradually lower the company's payout ratio -- which, at 91%, is admittedly worrisome. Meanwhile, Pfizer's stock is currently trading at around 12 times forward earnings, so investors who get in today are not paying up to own shares. That's an attractive combination, in my view.
Brian Feroldi has no position in any of the stocks mentioned. George Budwell owns shares of Pfizer. Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.