Don't underestimate the power of dividends -- especially when you reinvest those dividends over a long period of time. You might be surprised by how much reinvesting dividends can boost your total returns.
But what dividend stocks should you buy? I'd recommend turning your attention to the healthcare sector. It accounts for nearly one-fifth of the U.S. economy and claims plenty of solid dividend stocks. Three that I especially like are AbbVie (ABBV -1.23%), Pfizer (PFE -0.72%), and Welltower (WELL 0.47%). These top healthcare dividend stocks pay you to wait as each company's growth picks up momentum.
Image source: Getty Images.
1. AbbVie
AbbVie's dividend currently yields a little over 4%. The company has boosted its dividend by 140% since becoming a stand-alone entity in 2013. AbbVie should have plenty of financial flexibility to keep those dividend hikes coming in future years, too.
The big drugmaker appears to have a good plan in place to reduce its dependence on Humira, the world's best-selling drug. AbbVie already has two other blockbusters with cancer drug Imbruvica and hepatitis C virus (HCV) drug Mavyret. Two other already approved products should be huge winners over the next few years -- endometriosis pain drug Orilissa and leukemia drug Venclexta.
AbbVie's pipeline includes several candidates with tremendous potential. Risankizumab and upadacitinib could join Humira to solidify AbbVie's position at the top in immunology. The company is also hoping to add new approved indications for existing drugs such as Imbruvica and Orilissa.
Don't write off Humira yet, either. Market research firm EvaluatePharma predicts that Humira will still be the top-selling drug in the world at least through 2024. That's plenty of time for AbbVie's other drugs and pipeline candidates to ramp up sales. In the meantime, investors can look forward to the big pharma company's nice dividend payments.
2. Pfizer
Pfizer has paid a dividend every quarter in every year since late 1938. That's an impressive streak that I expect will remain unbroken for a long time to come. The dividend is also quite attractive, with a current yield of nearly 3.7%.
But while Pfizer's dividend looks great, the drugmaker hasn't generated tremendous growth in recent years. One big reason why is that Pfizer continues to face declining sales for several drugs that have lost exclusivity. In addition, the company has had product shortages with its sterile injectables business that weighed on sales.
The good news for Pfizer is that both of these issues should improve in the not-too-distant future. Pfizer CEO Ian Read stated in the company's Q2 earnings conference call that year-over-year comparisons for its sterile injectables business should improve beginning in the third quarter of 2018. Read has also expressed optimism that the negative impact from older drugs that have lost exclusivity will become much less of an anchor for the company after 2020.
Meanwhile, Pfizer claims several drugs with strong momentum. Anticoagulant Eliquis, which Pfizer co-markets with Bristol-Myers Squibb, and breast cancer drug Ibrance are at the top of the list. Pfizer anticipates even stronger growth for immunology drug Xeljanz. And the company has its best pipeline in years, with several promising drugs awaiting regulatory approval or in late-stage clinical testing.
3. Welltower
I have referred to Welltower as a retiree's dream stock -- in large part because of the company's fantastic dividend. Welltower's dividend yield currently stands at 5.4%. As a real-estate investment trust (REIT), Welltower must return at least 90% of taxable income to shareholders in the form of dividends.
Welltower ranks as the largest healthcare-focused REIT in the world. The company owned 1,077 properties as of June 30, 2018. These properties include senior housing communities, post-acute care communities, and outpatient medical facilities.
Where those properties are located is also appealing. Welltower's strategy is to focus primarily on high-growth urban markets. Not only do these markets have more potential customers for its properties, there also tend to be relatively high barriers to entry.
My prediction is that Welltower should enjoy solid growth over the long term. That's a pretty easy prediction to make. The number of Americans in the age groups most likely to move into senior housing or post-acute care communities is projected to increase dramatically over the next two decades.
The shortest wait
All three of these healthcare dividend stocks pay investors to wait for higher growth. I suspect, though, that the wait will be shortest for AbbVie.
Pfizer will probably return to solid growth after 2020. Welltower's growth is likely to really pick up midway through the next decade. AbbVie, however, has several major catalysts on the way relatively soon. The company could win FDA approvals for risankizumab and upadacitinib next year.
I like all three of these stocks over the long run. However, I think AbbVie is the most compelling buy right now. AbbVie has a great dividend and tremendous growth prospects, and the stock looks really cheap, with shares trading at less than 11 times expected earnings.
