Dividend stocks are favorites among investors for their ability to generate a stable income and the share price stability to be sold in a pinch. Moreover, a portfolio consisting of dividend-paying stocks with their payouts reinvested back into the same stocks would (hands down) outperform any other asset returns (such as bonds, treasuries, and gold) over a long period

Despite their popularity, it is not enough that dividend-paying companies generate stable cash flows; they must also find new ways to grow their business, or else societal, technological, and industry changes may force them to reduce or cut their dividends. Today, let's look at why Gilead Sciences (NASDAQ:GILD) has that growth potential and is among the best dividend stocks to choose from in the biotech sector

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Great payout

Since 2016, Gilead's trailing-12-month dividend payout has increased from $1.56 per share to $2.63 per share, giving the dividend a yield of 4.50% based on its stock price as of Oct. 28. That's pretty good considering the SPDR S&P 500 ETF Trust is only yielding 1.72%.

In addition, the company expects to generate between $6.25 to $7.65 in earnings per share (EPS) this year. That cash flow is more than enough to cover its dividend, giving the stock a reasonable payout ratio of between 34% to 42%. The lesser this ratio is than 100%, the safer the dividend payments.  

A booming catalyst

On Oct. 22, Gilead's antiviral drug, remdesivir, became the first and only treatment approved by the U.S. Food and Drug Administration (FDA) to treat COVID-19 in both adults and children requiring hospitalization. The company expects to manufacture more than 2 million treatment courses by the end of the year. At a price tag of $3,100 per treatment, that gives the drug an annual revenue potential of $6.2 billion, which is great considering the blue-chip biotech generated $22.4 billion in sales last year.

One obvious objection from investors, however, is that coronavirus treatments will become useless after coronavirus vaccines are approved and distributed. There is just one important caveat: The vast majority of experimental coronavirus vaccines at the end-stage are based on SARS-CoV-2 strains circulating in March. Since then, researchers have documented more than 12,000 mutations in SARS-CoV-2 genomes.

According to a study published in The Lancet, a patient from Nevada suffered a second COVID-19 infection in May after contracting the virus in April. Therefore, a vaccine may not be as effective as first thought if antibodies only grant immunity against a single strain of the SARS-CoV-2 (and only for a certain period of time) and not all new mutations of the COVID-19 virus. 

Right now, the coronavirus vaccine race participants are nearing the finish line. That means investors will soon want to see their hopes and expectations turn into results. Gilead is an excellent hedge in case COVID-19 vaccines go haywire during commercialization, a situation that would surely boost the relevance of remdesivir.

Staging a comeback

During the second quarter of 2020, Gilead's HIV, inflammatory disease, and cancer treatments brought in a combined revenue of $5.1 billion. The company's revenue has been declining since 2016 after its best-selling hepatitis C drugs cured patients of their condition and stopped generating sales. This year, Gilead's revenue may rebound sharply to $25 billion if the sales potential of remdesivir is realized. 

That's not all. The company also has four drugs in phase 3 clinical trials or awaiting regulatory approval. At a valuation of 3.4 times sales and 8.8 times free cash flow, Gilead has ample room for capital appreciation aside from its high dividend yield. Given its history of dividend growth, good payout ratio, solid underlying business, as well as an enticing sales catalyst, Gilead is a well-rounded dividend stock for investors to add to their watchlists.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.