What is the secret to attaining success as a long-term investor? As it turns, out there is no single secret. Actions such as sticking with business models that you understand, managing your emotions when investing, and diversifying your portfolio are all great in their own right. But if I had to pick just one, I would seriously consider selecting investments with demographic trends on their side.
With the median age in the U.S. expected to rise from 38 years of age in recent years to 43 by the year 2060, it's a safe assumption that the demand for healthcare isn't going anywhere. Here are two prominent healthcare stocks that are positioned to benefit from an aging U.S. population to consider buying this year and beyond.
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1. Johnson & Johnson
The first stock poised to ride the aging demographic wave is the $429-billion healthcare company, Johnson & Johnson (JNJ -0.36%). With 59 consecutive years of dividend increases, the stock is considered a Dividend King and offers investors what is possibly the safest dividend in healthcare. So, what backs up its market-topping 2.5% dividend yield?
For one, Johnson & Johnson has a very balanced business model. The company possesses widely used consumer health brands such as Band-Aid and Listerine, blockbuster pharmaceutical drugs including immunology drug Stelara and cancer drug Darzalex, its COVID-19 vaccine, and a variety of medical devices. While 54.8% of its $68.97 billion in year-to-date revenue was derived from its pharmaceutical segment (including the COVID vaccine), the remaining portion of its net sales was between its medical devices and consumer health segments. Johnson & Johnson's existing portfolio of products has performed so well that the company is anticipating 14.2% year-over-year revenue growth and 22% non-GAAP earnings-per-share (EPS) growth this year at the midpoints of its guidance.
And Johnson & Johnson's 50-plus indications for drugs in phase 2/3 clinical trials or registration should ensure consistent growth in the years ahead to support a growing dividend payout. That's why analysts believe the company will grow its EPS in excess of 8% annually over the next five years.
Despite Johnson & Johnson's remarkable dividend consistency and the late-stage pipeline necessary to continue its dividend increase streak, the stock appears to be underappreciated by the market based on its current valuation. At under 17 times this year's average EPS forecast, Johnson & Johnson trades markedly lower than the S&P 500's estimated P/E ratio of 23 for this year. Thus, I believe this is an opportune time for investors to stuff this classic dividend growth stock into their portfolio or add to their existing position.
2. UnitedHealth Group
The second stock that investors should contemplate buying this year and beyond is health insurer UnitedHealth Group (UNH -0.07%).
UnitedHealth Group's business consists of two segments, which are UnitedHealthcare and Optum. The former provides health insurance to employers, individuals, and beneficiaries of Medicare and Medicaid in the U.S. The latter segment uses data analytics and technology to enhance health system performance and lower healthcare costs to improve the consumer experience.
Whereas Johnson & Johnson will profit from increased demand for prescription drugs and medical devices, UnitedHealth Group should be able to cash in on increased demand for health insurance. Rising healthcare services costs and growing incidence rates of diseases such as diabetes and cancer will make health insurance more essential than it has even been. This is precisely why market research firm IMARC Group estimates that the global health insurance market will grow 7% annually from under $3 trillion last year to over $4 trillion by 2026.
The strong and climbing demand for health insurance is the underlying catalyst for analysts' expectations that UnitedHealth Group will grow its adjusted EPS 11.7% to $18.85 this year. And it also serves as the basis for their forecast of nearly 14% annual earnings growth over the next five years, which should bode well for the stock's dividend growth.
UnitedHealth Group's 1.3% dividend yield may only be in line with the S&P 500's, but the company's low dividend payout ratio coupled with its growth potential should lead to double-digit dividend increases in the medium term. And even though UnitedHealth Group offers a superior growth profile over the S&P 500 as a whole, both are trading at 21.1 times next year's respective analyst consensus. This is what makes UnitedHealth Group an overall buy for dividend investors looking to inject some growth into their portfolio.
