Dividend stocks are a critical part of a well-structured portfolio because of their ability to generate passive sources of income, or alternatively, compound returns on capital via a dividend reinvestment plan. Picking top dividend stocks, though, is anything but a straightforward process.
The good news is that the best dividend stocks have historically shared a few underlying qualities that make them stand out from the crowd. The key traits that most elite income stocks have in common are stable and growing free cash flows, a strong track record of regular increases to the dividend, and a positive long-term outlook.
So what's the best space to uncover the most compelling dividend plays right now? In my view, the biopharmaceutical industry arguably occupies the top spot when it comes to dividend stocks. Biopharmaceutical giants like AbbVie (ABBV 1.75%) and Amgen (AMGN 2.12%), after all, both possess an intriguing mix of strong free cash flows, exceptional dividend track records, and better-than-average growth prospects over the next decade. Read on to learn more.
Top of its class
AbbVie is a solid dividend stock to buy (or continue holding) for a few reasons. First off, the drugmaker has grown its dividend at the fastest pace among large cap pharmas since being carved out of Abbott Laboratories in 2013. Its modest trailing payout ratio of 60.4% also implies that further increases are feasible moving forward -- especially since the company's free cash flow is forecast to grow at industry-leading levels in the next two to three years. AbbVie, for what it's worth, is living up to its status as a dividend aristocrat, bestowed upon it by Abbott.
While top-flight dividend programs are unusual in the pharma space because of the enormous costs associated with clinical trials, AbbVie has managed to find a nice balance between maintaining its upper-tier dividend and investing in its vast clinical pipeline. In fact, AbbVie's late-stage clinical pipeline was pegged as the most valuable within its peer group last year, according to EvaluatePharma.
That's especially good news for the company's longer-term growth prospects. AbbVie, after all, is still heavily reliant on the anti-inflammatory megablockbuster, Humira, for the bulk of its sales. As the company's diverse oncology pipeline matures, however, AbbVie's revenue stream should start to better reflect its status as a top dog in the clinic. Fortunately, AbbVie now has until the end of 2022 to complete its ongoing pivot to oncology, thanks to the global patent resolution with Amgen over Humira's intellectual property portfolio last year.
AbbVie is arguably worth buying because of its generous dividend yield of 2.94%, rapidly growing footprint in the high-value oncology market, and the substantially lower risk of copycat versions of Humira breaking into the all-important U.S. market this year.
Amgen's dividend is set to rise
Amgen's $39 billion overseas cash stockpile is among the largest within the biopharmaceutical arena. So it wasn't surprising to hear that the company announced a sizable hike to its dividend last month -- once the tax reform legislation appeared to be a slam dunk. As a result, Amgen now sports a slightly above-average (for a pharma stock) forward-looking yield of 3.04%.
Perhaps the best part about Amgen's juicy dividend, though, is that the drugmaker's trailing payout ratio of 40.2% is close to the bottom of its blue chip biotech and big pharma peer groups. So with plenty of repatriated cash to play with moving forward and stable free cash flow, Amgen could boost its dividend yet again within the next twelve months.
The downside is that Amgen's cardiovascular drug, Repatha, has so far failed to live up to expectations, and the biotech's bid to build a thriving biosimilar business has also gotten off to a painfully slow start.
On the bright side, Repatha's recent label expansion as a preventative treatment for cardiovascular disease should light a fire under its commercial trajectory this year. The U.S. biosimilar market is also just getting on its proverbial feet from a regulatory standpoint. And when all the legal and regulatory kinks are worked out, Amgen should benefit immensely from this high-value space.
In all, Amgen should entice dividend investors this year due to its upper-echelon yield that appears set to edge even higher in the years to come.