One key tenet of being an income investor is to be sure you are diversifying your investments into not only multiple companies but also numerous economic sectors. That's because doing so can help shield your portfolio and its income from a downturn in one particular sector at any given time.
Healthcare is arguably a must-own sector for a couple of reasons. For one, everyone will need to access the healthcare system at some point, whether it's for a prescription, surgical procedure, or just a regular checkup. Second, the portion of the global population that is typically in need of the most frequent medical care is aged 65 and older -- and this group is expected to nearly triple between 2015 and 2050 to 1.6 billion people.
Here are two diversified healthcare stocks that should benefit from these trends.
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1. Johnson & Johnson
What's the sign of a well-run business? When most people throughout the world recognize a company's brands.
And it's safe to say that almost everybody knows at least a few of the products in Johnson & Johnson's (JNJ -0.69%) product portfolio. This is especially the case with the consumer-facing brands within the slow-growing consumer health segment, which will be spun-off by the company sometime next year. These include Listerine mouthwash, Band-Aid adhesive bandages, and over-the-counter allergy medication Benadryl.
As well-known as the brands within these segments are, they only accounted for 15.6% of J&J's $47.4 billion in first-half revenue.
The real catalyst of J&J's growth will continue to be its pharmaceutical segment. This includes the mega-blockbuster (i.e., at least $5 billion in annual sales) immunology drug Stelara and oncology drug Darzalex. The company also has 11 other drugs and its COVID-19 vaccine within its portfolio on pace to generate at least $1 billion in sales in 2022.
And with 99 drug indications in clinical development throughout therapy areas such as immunology and oncology, J&J should have the firepower to gradually push its sales and earnings higher. That's why analysts are projecting 4.1% annual earnings growth through the next five years.
Pairing this earnings growth with a dividend payout ratio that sits at a modest 44%, J&J should be able to build on its 60-year dividend growth streak. In fact, I anticipate 5% to 6% annual dividend growth for the foreseeable future from the company.
Yield-starved investors can pick up shares of J&J and its market-topping 2.8% dividend yield (a full percent higher than the S&P 500 index's 1.8% yield) at a fair valuation. The company's forward price-to-earnings (P/E) ratio of 16.2 is only slightly higher than the S&P 500 healthcare sector's forward P/E ratio of 15.4.
2. AstraZeneca
U.K.-based AstraZeneca (AZN 0.49%) is among the largest and most diversified pharmaceutical companies in the world with product sales of $36.5 billion in 2021 (in constant currency terms).
The company's product portfolio consists of a cancer therapy called Tagrisso, which is set to eclipse $5 billion in total sales in 2022. AstraZeneca also has 13 other products that are on track to surpass $1 billion in 2022 total sales spread throughout the oncology, respiratory and immunology, vaccines and immunology, and rare disease areas.
Along with its drug pipeline of 184 projects under development, this is why analysts are forecasting 14.8% annual earnings growth from the company for the next five years. The company also offers a market-trouncing 3.6% dividend yield to shareholders at the current share price. Given that the dividend payout ratio comes in under 60%, this strong starting income appears to be safe.
And investors can scoop up shares of AstraZeneca at a forward P/E ratio of 16.6. This is well above the S&P 500 pharmaceutical industry's average multiple of 12.9. But few pharmaceutical companies have the double-digit annual earnings growth potential of AstraZeneca, which arguably justifies this valuation.
