Investors trying to build up a stream of passive income with dividend-paying stocks have an important decision to make every time they go shopping.
You could fill your portfolio with relatively low-yielding stocks that can crank up their dividend payouts, but this takes time that you may not have. If time isn't on your side, you could be better off buying high-yield stocks, even if they might not be able to raise their payouts by much.
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Whether you have a lot of time before you'll be ready to retire or not, these two dividend growth stocks could be right up your alley. They're offering yields that are twice as attractive as the average stock in the benchmark S&P 500 index, which offers a 1.55% yield at recent prices.
1. Medtronic
Medtronic (MDT 0.62%) is a leading healthcare technology provider with a product lineup that includes next-generation pacemakers, insulin pumps, and spinal cord stimulators. Sales of such devices generally come at the tail end of several medical tests and multiple visits with healthcare providers.
The COVID-19 pandemic upended the regular flow of patient traffic that typically leads to the sale of Medtronic's products. Luckily, it appears the worst is in our rearview mirror. During its fiscal first quarter that ended on July 28, revenue rose 4.5% year over year. That was a sharp improvement over the 8% decrease it reported a year earlier.
In addition to a more regular progression of patients through the pre-surgery process, recently launched devices containing next-generation technology could push sales higher still. In August, the European Medicines Agency granted marketing authorization to Inceptiv, a new spinal cord stimulator for chronic pain that automatically adjusts itself.
Medtronic shares are down around 39% from the all-time high the stock reached back in 2021. Despite the challenges that have pressured its stock price, the company has maintained its 46-year streak of consecutive annual payout raises. In fact, its dividend payout has grown 38% over the past five years.
At recent prices, Medtronic offers a 3.4% yield. With plenty of new devices to help it complete an ongoing turnaround, it could become one of your largest income producers by the time you're ready to retire.
2. CVS Health
Shares of CVS Health (CVS -0.22%) are down 36% from a peak the stock reached in 2022. At recent prices, the stock offers a 3.4% yield and heaps of potential dividend growth ahead.
CVS Health paused dividend raises for a few years to help reduce the debt it accumulated by acquiring Aetna, its health insurance benefits management business, in 2018. For two straight years, though, it's given shareholders big 10% raises, and there's room for more.
CVS Health generated around $15.9 billion in free cash flow during the past 12 months. The company needed just 17.5% of this sum to meet its expanding dividend commitment.
Shares of CVS Health recently fell after the company reported second-quarter earnings that fell for more reasons than one. Investors were also disturbed by Blue Shield of California's recent plan to relegate CVS Health's pharmacy benefits management (PBM) business to just specialty pharmaceuticals.
Blue Shield of California expects $500 million in annual savings by stepping back from its relationship with CVS Health's PBM. If Blue Shield of California actually realizes the savings it expects, a knock-on effect could cause the stock could fall even further.
Cautious investors will be glad to know that CVS Health is already pivoting away from pharmacy benefits and toward physician services. It began 2023 with thousands of doctors on its payroll and added thousands more with the recent acquisitions of Signify Health and Oak Street Health.
An army of care providers on its payroll means CVS Health can directly provide many of the benefits it also gets paid to manage. At the moment, UnitedHealth Group is the only other health benefits manager that employs enough physicians to fill a baseball stadium.
UnitedHealth and CVS Health have such a long lead that they're likely to dominate the space for the long term. Buying some shares at their beaten-down price and holding them through your retirement years looks like the right move.
