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These 3 Stocks Just Hiked Their Dividends: Should You Buy Them?

By Kody Kester – Jan 1, 2022 at 10:30AM

Key Points

  • Amgen hiked its dividend more than 10% and has the pipeline to help it grow further.
  • Merck upped its dividend over 6% and also has potential, new products ahead to support it.
  • CVS raised its dividend 10% and is poised to take advantage of several healthcare trends.

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All three companies rewarded shareholders with significant payout increases.

For an income investor, there is no greater gift during the holiday season than a robust dividend raise. That's because more passive income can provide you with a floor in your standard of living and ease your financial worries.

Pharma stocks Amgen (AMGN 0.10%) and Merck (MRK 0.44%), and diversified healthcare stock CVS Health (CVS -0.52%) each recently announced boosts in their payouts. The question is, should you buy these stocks or sit on the sidelines waiting for a correction?

A person picks up a prescription at a pharmacy.

Image source: Getty Images.

1. Amgen

Early in December, Amgen announced a 10.2% raise in its quarterly dividend to $1.94 per share. This pushed its dividend yield up to 3.4%, which is nearly triple the S&P 500's 1.2%.

Amgen continues to bring key drugs to the market. The most recent approval came from the U.S. Food and Drug Administration (FDA) for the severe-asthma drug co-developed with AstraZeneca (AZN 0.30%), Tezepelumab, which I believe has blockbuster potential

And Amgen's pipeline has more than 20 compounds in phase 2 or phase 3 clinical trials. This should more than offset the decline in legacy medications like arthritis drug Enbrel and a drug to help chemotherapy patients, Neulasta. It's why analysts are forecasting 6% annual growth in adjusted earnings per share (EPS) through the next five years.

The company's respectable pipeline paired with a 41.9% dividend payout ratio should allow nice dividend growth ahead. Plus, at its current $226 share price, Amgen trades at a forward P/E of 12.5. That's quite reasonable considering the stock's growth prospects, which is why I believe Amgen is still a buy.

2. Merck

Pharmaceutical giant Merck also had good news for shareholders recently, increasing its quarterly payout 6.2% to $0.69 per share in late November. The stock now offers a market-beating 3.6% yield.

Merck boasts the top-selling cancer drug (and also second-best-selling drug in the world) Keytruda, which made up just over a third of its $35.2 billion in year-to-date net revenue. The company also appears to be well-positioned for when Keytruda's patent expires in key markets by 2028. As of October, Merck had 71 programs in phase 2 clinical trials and 25 in phase 3 trials.

The strong pipeline has analysts projecting 15% annual earnings growth over the next five years. And with a payout ratio now at 45.8%, there's plenty of room to boost its dividend as well.

At its current $76 share price, Merck has a forward P/E of just 10.6. The blend of yield, value, and growth makes it a compelling buy at this time.

3. CVS Health

CVS Health boosted its quarterly dividend 10% to $0.55 per share around the middle of December. Even though it has the lowest yield of the three stocks on this list, it's still a market-eclipsing 2.1%.

Few stocks are poised to take advantage of as many healthcare trends as health insurer and pharmacy giant CVS. The gradual rise in U.S. retail prescription volumes will help the company in a couple of ways. First, CVS Health will fill more prescriptions, boosting revenue and earnings. Second, the company will likely have more foot traffic and retail sales when some customers pick up their medications in person rather than having them delivered.

And as prescriptions and the overall cost of healthcare become more expensive, it builds a significant tailwind for its health insurance subsidiary, Aetna, because more individuals will purchase coverage to hedge against these rising costs.

That's why analysts are predicting CVS Health will be able to grow its EPS by 6% annually over the next five years. And with a dividend payout ratio of 25.2% for this year, it's reasonable to expect strong hikes for the future.

Investors can lock this all up at a forward P/E of just 12.4. It's a reasonable valuation considering CVS Health's growth potential, making the stock one of the top dividend payers to buy now.

Kody Kester owns Amgen, CVS Health, and Merck & Co. The Motley Fool recommends Amgen and CVS Health. The Motley Fool has a disclosure policy.

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