This is kind of a strange time to be a passive income investor. After more than a decade of ultra-low interest rates, you can suddenly receive a risk-free 3.5% interest rate on your totally liquid savings account deposits. That's a little more than twice as much as the yield you'd receive from the average dividend-paying stock in the S&P 500 index.
If you want a portfolio that generates enough dividend income to fuel your dream retirement, it's a good idea to fill it with companies that have the capacity to raise their payouts at a rapid pace. Both of these companies have histories of rapid dividend hikes and look well-positioned to continue boosting those payouts in the years to come.
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AbbVie
AbbVie (ABBV -1.03%) is a leading pharmaceutical company that offers investors a 3.7% yield at its current share price. It was the pharmaceutical segment of Abbott Laboratories until its parent spun it off as a separate company in 2013. Growing sales of its blockbuster drugs allowed AbbVie management to raise its payout by a whopping 270% over the past decade.
Abbott spun AbbVie out as a separate company in part to shield itself from the eventual loss of revenue from AbbVie's top product, Humira. That anti-inflammatory injection is approved for a host of conditions, and currently generates around $22 billion in annual sales.
In 2018, Humira lost its market exclusivity in Europe to lower-cost biosimilar versions, and international sales of the drug plummeted. Shares of AbbVie offer an above-average yield right now in part because U.S. Humira sales, which reached the level of $20 billion annualized in the third quarter, will begin shrinking in 2023 as biosimilars take off in the domestic market.
AbbVie looks like a great dividend growth stock to buy despite the impending loss of U.S. Humira sales. Over the years, it has acquired and developed multiple new blockbuster drugs, the sales of which can more than offset the looming declines from Humira and allow AbbVie to continue raising its dividend payout. For example, in 2019, the company launched a pair of drugs -- Skyrizi for psoriasis and Rinvoq for arthritis -- that between them are intended to provide better options for the indications that Humira treats. These two are already generating more than $8 billion in combined sales annually.
Over the past 12 months, AbbVie's finely tuned operation generated an astounding $21.9 billion in free cash flow. That was more than twice as much as was necessary to maintain the company's dividend payout. In the years ahead, raising its payout in line with its earnings growth should be a breeze.
CVS Health
At the current share price, CVS Health (CVS -1.07%) offers a 2.5% yield. This might not be as attractive as AbbVie's at the moment. However, given the reliable profits its collection of related healthcare businesses generate, the stock is a dividend growth investor's dream come true.
CVS may not have shown up on your dividend growth stock screen because it held its payout steady from 2018 through 2021. Despite that three-year pause in hikes, CVS Health has boosted its dividend by an impressive 169% over the past decade.
It froze the payout to help cover the costs of its transformational acquisition of Aetna, a leading health insurance company. And while CVS Health may be a bit infamous for the extraordinarily long receipts customers receive when shopping at its ubiquitous chain of retail pharmacies, it's the less-visible parts of the business that make it a great dividend growth stock to buy.
As an insurance benefits manager, CVS Health collects premiums from an estimated 35 million people. It also runs the country's leading pharmacy benefits manager, which has more than 110 million plan members. Providing the health benefits it also gets paid to manage is an extremely lucrative position to be in. The company has been able to repay $25.2 billion of debt since it closed its Aetna acquisition.
CVS Health's dual position as both a provider and manager of health benefits is about to get a lot larger. Its $8 billion acquisition of Signify Health is expected to close in the first half of 2023. Signify Health operates a network of more than 10,000 clinicians, and it expects to connect with nearly 2.5 million unique members in their homes this year. A much larger hand in the delivery of primary care services will help CVS Health push its dividend much higher in the years to come.
