No one says "no" to some passive income on the side, but finding ways to generate some can be tricky. That's why many investors turn to the stock market and choose to target dividend-paying companies. Besides the passive income potential, dividend stocks have historically outperformed their non-dividend-paying peers.
Focusing on these types of companies is, therefore, an excellent strategy. But for it to work, it is essential -- as always -- to choose wisely. Let's consider two strong dividend stocks ideal for the job: Novartis (NVS 0.72%) and Apple (AAPL 0.52%).
1. Novartis
Pharma giant Novartis currently offers a juicy yield of 3.98% along with a reasonable cash payout ratio of 65%. Backing the Switzerland-based drugmaker's dividend is a strong business built to last. In 2021, the company had 14 blockbuster products, most of which saw their revenue increase compared to 2020. In the first quarter, Novartis' sales increased by a decent 5% year over year on a constant currency basis to $12.5 billion.
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Some of the company's best-selling products continue to perform well. They include immunosuppressant Cosentyx, heart failure therapy Entresto, and Zolgensma, a gene-editing treatment for spinal muscular atrophy. In the first quarter, sales of Cosentyx jumped by 10% year over year to $1.2 billion. Entresto's revenue of $1.1 billion grew by 39% year over year, while Zolgensma's sales came in at $363 million, 14% higher than the year-ago period.
On the bottom line, Novartis' earnings per share of $1.46 increased by 12% on a constant currency basis compared to the prior-year quarter. Novartis has a rich pipeline full of promising programs. The company is currently running 52 phase 3 studies, not to mention many more in phase 2 or phase 1 trials.
Even at a modest 25% success rate for the company's current late-stage trials, Novartis should be able to add new products or score plenty of label expansions. That will translate to additional sources of revenue for the company. Novartis is looking elsewhere for growth, too. The company is currently searching for potential attractively priced acquisition targets to boost its business.
These efforts may or may not be successful, but Novartis has enough things going its way to continue rewarding shareholders with growth and dividend payments. And as a leading drugmaker that will profit from long-term trends -- such as the world's aging population -- Novartis looks ideally positioned to remain successful for many years to come. This pharma stock is the kind that helps investors sleep better at night.
2. Apple
At first glance, Apple may not seem like an outstanding dividend stock. The company offers a yield of 0.58%, which compares unfavorably to that of the S&P 500 at 1.37%. But there is more to the story. First, Apple generates tons of cash. The company had $105.8 billion in free cash flow as of the close of the second quarter of its fiscal year 2022, which ended on March 26. The company's free cash flow grew by 11.6% year over year. Also, Apple's cash payout ratio of 13.9% suggests that it can sustain plenty of dividend increases.
Then there is the company's business, which is still performing despite severe headwinds. During the second quarter of its fiscal 2022, Apple's total net sales increased by 9% year over year to $97.3 billion. The tech giant's total sales were a record for this period. That's despite the fact that Apple is dealing with supply-chain issues and a challenging economic environment that will affect the company's ability to sell its pricy gadgets.
Management estimates that supply-chain constraints will negatively affect its sales by $4 billion to $8 billion during the company's third quarter, a much more significant impact than what it experienced during its second quarter.
However, investors should look past these short-term issues. Even in these difficult times, demand for Apple's iPhone and other hardware remains strong. The company's iPhone, Mac, and wearable segments had a record second quarter in sales. That says a lot about what an incredible brand name Apple has successfully built over the years. Further, Apple continues to grow its all-important services segment.
Once customers are locked into Apple's ecosystem, there are many ways the company can monetize them -- and it is doing a great job of it. The company's services unit saw a record during its second quarter, too. This segment's juicier margins will work wonders for Apple's bottom line. While the supply chain and economic issues it faces aren't inconsequential, Apple's business is strong enough to survive these problems and continue thriving for years while still rewarding shareholders with dividend increases.
Indeed, the company recently announced it was raising its dividends by 5%. Investors who hold on to Apple's shares can expect many more of these dividend hikes in the future.
