Companies that regularly increase their dividends -- a.k.a. dividend growth stocks -- tend to be excellent wealth creators for long-term investors. That said, it's not exactly easy to unearth quality dividend stocks worth holding for lengthy periods of time.
Which dividend growth stocks should patient investors have on their radar in 2020? The pharmaceutical giants AbbVie (ABBV 0.98%) and Gilead Sciences (GILD 0.12%) are two names that could produce market-beating returns for the next decade and beyond. Here's why.
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AbbVie: A proven cash cow for income investors
Since its inception as a spinoff from Abbott Laboratories, AbbVie has averaged an annual 24.7% hike to its dividend. This enormous growth rate, combined with the stock's poor showing in 2019 due to Humira's patent woes, have culminated in the drugmaker sporting a junk bond like yield of 5.28% at current levels. That's easily one of the highest payouts in the realm of large-cap biopharmaceuticals.
Can AbbVie afford to keep plowing cash into its already rich dividend program? The answer is a resounding yes. Even though AbbVie's sky-high payout ratio of 183% suggests otherwise, there are two clear-cut reasons to have faith in the drugmaker's ability to retain its status as a Dividend Aristocrat for years to come:
- AbbVie's highly diversified growth portfolio -- consisting of the hematology/oncology medicines Imbruvica and Venclexta, as well as the immunology products Skyrizi and Rinvoq -- should keep its top line growing at a healthy rate over the course of the next decade.
- AbbVie's megamerger with Allergan should provide another powerful boost to the company's free cash flows post-transaction and lower the impact of Humira's eventual decline early in the next decade.
All told, AbbVie should have no problem posting regular hikes to its dividend in the years ahead, making it a great stock to own for the buy-and-hold crowd.
Gilead: Patience is required but a turnaround is inevitable
To be up front, Gilead hasn't been a winning stock in quite some time. Declining hepatitis C drug sales, multiple failures in the clinic, and the decision to grossly overpay for Kite Pharma's cell therapy platform have all taken their toll on Gilead's shares.
Despite instituting a fairly rich dividend program in 2015, for example, the biotech's shares have lost investors nearly 40% of their capital since the biotech paid its first dividend nearly four and a half years ago. Pouring salt into the wound, Gilead has also raised its dividend by 10.4% on average per year over this period, which is a fairly strong growth rate for a large-cap biotech.
Why should dividend investors reconsider this name in 2020? The core reason is that Gilead is starting to emerge from this lengthy trough period. Under new CEO Dan O'Day, the biotech has made tremendous strides toward broadening its product portfolio with promising drug candidates like filgotinib and KTE-X19, as well as improving Kite's long-term commercial outlook by setting it up as a largely independent entity.
So, with a forward-looking annualized yield of 3.81% at present and one of the largest cash positions in the industry, income investors may want to seriously consider this former biotech powerhouse in 2020. Gilead's long-awaited turnaround, after all, is finally showing definitive signs of taking shape.
