Investors looking for smart ways to bump up their stream of passive income want to push their shopping carts toward the healthcare aisle. A handful of dividend-paying stocks have been beaten down recently, even though there's a good chance their payouts will keep rising year after year.
At recent prices, Kenvue (KVUE -0.84%) and CVS Health (CVS -0.22%) offer dividend yields of 3.4% or better. Here's how they could pump up your recurring stream of passive income.
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Kenvue
Earlier this year, Johnson & Johnson spun its consumer health segment off into a new company called Kenvue. So far the results are mixed, which caused the stock to fall about 25% from its starting point.
The dividend program Kenvue began in July offers a 4% yield now that the stock price is down. At recent prices, it offers a 4% yield, and annual payout raises could eventually make it a top contributor to your passive-income stream. Johnson & Johnson has raised its dividend payout for 61 consecutive years, and Kenvue appears prepared to follow its example.
During Kenvue's fiscal second quarter, ended July 2, net income fell to $430 million from $604 million in the previous year's period. Earnings contractions are generally bad news, but this recent spinoff's performance was probably better than it seems on the surface.
The 2022 operating results Kenvue compared its recent performance to were recorded when it was still part of Johnson & Johnson. Now that it's flying solo, Kenvue had to issue some debt, which drove quarterly interest expenses up by $53 million. Kenvue's second-quarter results were also limited by higher U.S. taxes on foreign earnings, plus new limitations on its ability to use foreign tax credits.
Second-quarter earnings contracted, but Kenvue's consumer health brands, such as Neutrogena, Tylenol, and Listerine, are still increasingly popular. Total second-quarter sales rose 5.4% year over year, or 7.7% if you ignore the effects of a stronger U.S. dollar.
Once the dust settles from the temporary disruptions associated with Kenvue's recent spinoff, its bottom line and dividend could rise at roughly the same pace as sales. The shares look like a bargain now that they're trading at just 15.6 times the midpoint of management's earnings estimate for the current fiscal year.
CVS Health
CVS Health is famous for its leading chain of retail pharmacies, but there's a lot more to this healthcare conglomerate. In addition to selling pharmaceuticals, it runs one of America's largest pharmacy benefits managers. In 2018 it acquired Aetna, a leading health insurance benefits management company.
Aetna collects monthly premiums from around 36 million people. With 1,100 walk-in medical clinics located in its retail stores plus 177 primary care clinics, CVS Health can directly provide many of the health insurance benefits it's also paid to manage.
At recent prices, CVS Health offers a juicy 3.4% dividend yield, and it's on the rise. The company treated shareholders to a 10% raise for two years in a row, and there could be more big payout bumps ahead. The company was able to meet its current dividend commitment with just 17% of the free cash flow it generated in the past year. That gives it plenty of room to raise its payout even if earnings contract slightly this year.
Shares of CVS Health have tumbled 26.4% in 2023, for a number of reasons. A big one happened this summer, when the Centers for Medicare and Medicaid Services (CMS) proposed a 3.34% reduction in the conversion factor used to determine reimbursement rates physicians can charge Medicare for specific procedures.
The changes CMS proposed could curtail growth for CVS Health for about a year, but it would hardly be a disaster. Long-term investors who buy the stock on the dips could come out miles ahead.
