If you're an income-focused investor, you shouldn't settle for the paltry 1.3% yield that the average S&P 500 stock pays today. You can find much better yields out there that don't require you to take on significantly greater risk.
For example, at their current share prices, both Novartis (NVS -1.42%) and Chevron (CVX -0.80%) yield more than 3%. And whether you want to play it safe and invest in the healthcare sector or hedge against inflation with a top oil and gas stock, they can also help you diversify your portfolio along the way.
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The case for Novartis
If you buy shares of Novartis today, you'll collect around 3.7% just in dividend income at the current payout level. The pharmaceutical company has increased its annual dividend payments for 24 years in a row -- and a hike this year would make it a Dividend Aristocrat. Its payout ratio sits at 75%. While ideally, that could be a bit lower, it is a level that indicates that the dividend is sustainable, and still offers room for more payout hikes.
Plus, Novartis is in solid financial shape. Management last month announced a new share buyback authorization under which it could repurchase up to $15 billion worth of its own stock before the end of next year. This comes after the company sold off its stake in healthcare company Roche, which gave it an influx of $20.7 billion in cash.
Long term, Novartis looks safe. It expects to generate 4% annualized sales growth through 2026. And it also has 20 treatments in mid-stage clinical trials that it estimates could generate more than $1 billion each in annual sales -- assuming they earn regulatory approval -- providing it with plenty of potential avenues for additional growth. Today, the business enjoys strong gross margins of around 70%, and it typically pockets close to 20% of revenue as profit.
For investors seeking a safe, dividend-paying healthcare stock to add to their portfolio, Novartis should be near or at the top of their list. It's also a relatively cheap buy, trading at a forward price-to-earnings multiple of 13. By comparison, Johnson & Johnson trades at a multiple of more than 15, and drugmaker Eli Lilly trades at a multiple of more than than 27.
The case for Chevron
If you're looking for a stock to help hedge your portfolio against inflation, oil and natural gas giant Chevron could be an attractive choice. With crude oil prices on the rise over the past year, the stock has been a top performer. It's up by 36% over the past year while the S&P 500 has risen by a more modest 13%.
At current share prices, this energy company yields 4.2%, and unlike Novartis, it's already a Dividend Aristocrat. Last year, it announced its 34th straight annual hike when it boosted its payout by roughly 4%. And as long as oil prices remain high -- as they are likely to while inflation and supply/demand imbalances persist -- Chevron management could increase the payout at even higher rates.
For the nine-month period ended Sept. 30, the company reported earnings of $10.6 billion, a major improvement from its loss of $4.9 billion during the same period a year earlier. The company also reported record-high quarterly cash flow in Q3 -- around $6.7 billion vs. just $1.9 billion in the prior-year period. And the business has been putting that money to good use. In Q3, it paid down $5.6 billion worth of debt and also repurchased $625 million worth of its shares.
There's some risk with investing in Chevron as its performance will ultimately be tied to the price of oil. The company certainly benefited from higher average energy prices last quarter. In the U.S. market, Chevron's average sales price per barrel of crude oil and natural gas liquids was 87% higher at $58; internationally, it was up by 74% to $68.
Some analysts project that the price of Brent crude, a key industry benchmark, could reach $100 per barrel this year. The last time it hit that level was in 2014. If the price does soar to those levels, Chevron could be another top stock to own this year and would be likely to deliver another record-setting performance.
Today, Chevron trades at a modest forward price-to-earnings ratio of 12, which is below the ratio of 15 investors normally target. ExxonMobil trades at a similar multiple. But because Chevron has a slightly better balance sheet and carries less debt, it may be a bit of a safer buy than its peer, especially in a rising interest rate environment.
