Forget Apple: Here's a Better Dividend Growth Stock

There is much to admire about Apple (AAPL 0.38%). The iPhone maker has long been a leader in the tech industry, and its innovative approach has translated to excellent financial results and market-beating returns for the past decade. Apple also pays a dividend, and since the company generates billions in revenue and profits every year, some income-oriented investors may look at the tech giant as an excellent dividend-growth option.

But it's worth noting that there are scores of companies that are arguably much better dividend stocks than Apple, and right now, Amgen (AMGN 0.55%) is one of them. Of course, from a growth investor's standpoint, the tech giant is handily outperforming the biotech giant: Shares of Apple are up by 77% year to date -- compared to a 15.11% jump for the S&P 500 -- while Amgen's stock is down by 3.2%. But the drugmaker is a better pick than Apple for dividend investors.

Source: YCharts. Yields based on Dec. 14, 2020, share prices.

Why Amgen is an excellent pick for income investors

Before buying a company's shares because of its dividend, it's essential to check several metrics first. Some of the most important are listed in the table above, and Amgen beats Apple in all but one: cash payout ratio. However, Amgen's cash payout ratio of 35.98% is still conservative. It gives the drugmaker plenty of room to continue delivering steady dividend increases, provided it can keep generating strong revenue and earnings. 

Amgen seems more than capable of doing just that. During the third quarter, its revenue grew by 12% year over year to $6.4 billion. That top-line growth was driven by several products, including Prolia, a treatment for osteoporosis, whose sales increased by 11% year over year to $701 million. Other notable performers included Repatha, a drug used to treat patients with high levels of cholesterol: Its sales during the quarter came in at $205 million, 22% higher than the year-ago period.

Perhaps the most important source of Amgen's Q3 top-line growth was psoriasis and psoriatic arthritis treatment Otezla. Amgen bought this drug in November 2019 for $13.4 billion from Celgene, a biotech that was acquired that same month by Bristol Myers Squibb in a transaction valued at $74 billion. Bristol Myers and Celgene had to divest some assets, including Otezla, due to regulators' antitrust concerns regarding their merger. 

Image source: Getty Images.

During the third quarter, sales of Otezla came in at $538 million, compared to $547 million a year prior. The decline was a result of the pandemic and low inventory levels, but considering that Amgen wasn't the company recording Otezla's sales in Q3 2019, the drug still had a positive impact on its overall revenue. 

Otezla's expected revenue growth should help Amgen compensate for some of the sales declines of its other drugs, such as Enbrel. During the third quarter, sales of the rheumatoid arthritis treatment dropped by 3% to $1.3 billion, The decrease was due to lower sales volume driven by competition. On the bottom line, Amgen's earnings per share increased by 5% year over year to $3.43, and it generated $3.2 billion in free cash flow -- essentially flat year over year.

It is also worth pointing to Amgen's pipeline, which includes more than two dozen products undergoing phase 3 clinical trials, and additional products in phase 1 or phase 2 studies. If even a handful of those are successful, which seems more than likely, the additional revenues should help the company continue growing its top and bottom lines at a good clip.

The key takeaway for investors

This biotech company has a higher dividend yield and a higher dividend per share than Apple, and over the past five years, it has raised its payout at a faster rate. What's more, Amgen is positioned to continue rewarding its shareholders by way of dividend increases: A conservative payout ratio and the ability to record strong and growing revenue and earnings. All those things (and more) make Amgen a strong pick for income-oriented investors.