Dividend stocks have a well-earned reputation for outperformance. Modern portfolio theory (MPT), however, indicates that growth investors should strictly adhere to a couple of critical guidelines when picking dividend stocks for their portfolios.
Among the most important guideposts recommended by the peer-reviewed MPT literature are selecting stocks with dividends lower than the average of the benchmark S&P 500 index; selecting stocks with premium valuations and a track record of positive annual returns; and selecting stocks in fast-growing sectors like healthcare or technology. Here is a brief overview of one supercharged dividend stock that ticks all of these boxes.
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Eli Lilly: A dividend powerhouse with the wind at its back
Eli Lilly (LLY 5.96%) is the world's most valuable pharma company with a market capitalization of $554 billion. The pharma giant develops and markets drugs for a wide array of therapeutic areas, such as diabetes, oncology, immunology, and neuroscience. It also sports a robust and highly innovative clinical pipeline that's poised to capture an outsized portion of multiple high-growth markets such as obesity care, cardiovascular disease, and Alzheimer's disease. As one example, Eli Lilly's next-generation weight loss drug retatrutide could give it a major competitive advantage in this high-value market by the middle of the next decade.
How does Eli Lilly stock fare on the criteria outlined above? The drugmaker currently pays a modest dividend of 0.77%, which is well below the S&P 500 average of 1.62%. Its shares also trade at a premium valuation of almost 48 times forward earnings, and its shares have risen by more than tenfold over the prior 10 years. In fact, Eli Lilly has been the best-performing big pharma stock by a wide margin over this period. Its shares have also markedly outperformed several benchmark indices such as the S&P 500 since 2013.
Lastly, Eli Lilly operates in the ultra-high growth healthcare sector. According to a recent Congressional Budget Office report, U.S. healthcare spending is projected to rise from $4.4 trillion in 2022 to nearly $8 trillion in 2035. This parabolic growth is expected to be driven by a hefty increase in demand for pharmaceuticals, stemming from the aging of the U.S. population, along with broader access to healthcare owing to expanded insurance coverage. These powerful tailwinds should immensely benefit leaders in the space like Eli Lilly.
Time to buy?
While bears have criticized the drugmaker for its hefty valuation, its near-industry high multiple is a reflection of its strong long-term growth prospects over the next 10 to 15 years. Moreover, additional business development activity, which the company has been excelling in since its last major bout with the patent cliff nearly a decade ago, could further boost its earnings power in the years to come. So, even though Eli Lilly's stock screens as expensive from a price-to-earnings standpoint, there are solid reasons for its premium valuation. As a result, growth investors shouldn't hesitate to buy this blue-chip dividend stock right now.
