The motives of investing may vary from one investor to the next. Some may want to leave an inheritance behind to their family, while others may opt to donate to their favorite charitable causes. But the overall goal of all investors, to at least some degree, is to gradually build wealth over the long run.
And healthcare is one of the best sectors to achieve that aim. This is because, as the world grows in population, age, and wealth, so will the demand for healthcare. The following two healthcare stocks look like great buys for investors seeking to collect both above-average income and increase wealth. Here's why.
The lifetime risk of cancer is roughly 40% for Americans. The good news for cancer patients is that Merck's (MRK 1.30%) cancer drug called Keytruda is approved in the U.S. to treat 19 different forms of the disease. This explains how the potent drug is set to surpass $20 billion in sales in 2022.
And if its leadership in oncology wasn't enough, the company also has blockbuster products (i.e., greater than $1 billion in annual sales) in numerous therapy areas. These include virology with its anti-viral COVID-19 treatment called Lagevrio, vaccines with its human papillomavirus vaccine franchise known as Gardasil, diabetes treatments Januvia and Janumet, and the acute hospital care product named Bridion.
Looking out over the long term, Merck's pipeline is just as strong as its existing products. This is supported by the fact that the company has 116 projects in late-stage clinical development, which should more than supplement lost revenue from the looming patent expiration of Keytruda later this decade.
That's why analysts are projecting that Merck's earnings will compound at 11.1% annually through the next five years, which is far above the general drug manufacturer industry average of 6.1%.
Merck's 3.1% dividend yield is twice that of the S&P 500 index's 1.6% yield, which also makes it a great pick for income investors. And better yet, the dividend payout ratio is positioned to be just 37.5% in 2022. This leaves plenty of room for future dividend growth.
The cherry on top of the income and growth sundae that is Merck is its valuation. The stock can be purchased at a forward price-to-earnings (P/E) ratio of just 11.8. For context, this is barely higher than the industry average forward P/E ratio of 11.
With 49,000 patents in its portfolio for over 70 medical conditions, including diabetes and Parkinson's disease, the reach of Medtronic (MDT 0.04%) as a medical devices company is arguably unmatched. This is supported by the fact that Medtronic's products serve approximately 72 million patients a year.
With the global population expected to increase a couple of billion between now and 2050 to 9.9 billion, Medtronic's patient base will likely expand as well. That's because the company has more than 300 clinical trials in progress across its four therapy areas of cardiovascular, diabetes, medical-surgical, and neuroscience.
Thanks to the breadth of Medtronic's product portfolio and pipeline, analysts are anticipating that the company's earnings will grow at 12.7% annually for the next five years.
Aside from the healthy growth potential of Medtronic, its 3% dividend yield is yet another appealing characteristic. And because the dividend payout ratio is poised to be 49.2% for the current fiscal year, the company appears set to build on its reputation as a Dividend Aristocrat in the years to come.
Medtronic's valuation seals the deal to make it a buy for both income and growth investors. The stock's forward P/E ratio of 15.8 is materially below the average for the medical devices industry of 24.7.