Now that 2023 is firmly in the rearview, we can say without a doubt that it was a remarkable year for stocks. The benchmark S&P 500 index soared 24% last year, and the Dow Jones Industrial Average reached a new record high.
Last year wasn't a rotten one for these two stocks, but they didn't keep pace with the benchmark index. These laggards that underperformed last year have been under enough pressure that they offer above-average dividend yields at the moment.
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Above-average yields aren't much good to income-seeking investors if companies can't maintain and raise their payouts. These stocks stand out because, in addition to relatively high yields, their underlying businesses benefit from competitive advantages that could allow them to keep raising their payouts in the decade ahead.
Medtronic
Medtronic (MDT +0.63%) is the world's largest manufacturer of medical devices that health systems purchase in bulk. Its size gives it economies of scale, but this isn't its only advantage. Medtronic also develops more high-value devices, such as replacement heart valves, than any of its competitors.
NYSE: MDT
Key Data Points
It's still January, but Medtronic has already earned regulatory approvals for multiple devices. The U.S. Food and Drug Administration (FDA) recently approved a deep-brain stimulation system called Percept that can reduce tremors related to epilepsy and Parkinson's disease. In Europe, regulators recently granted marketing approvals for a new insulin-pump sensor and the Micra family of leadless pacemakers.
Plowing profits from today's devices into the development of tomorrow's devices is a game plan that has allowed Medtronic to raise its dividend payout for 46 consecutive years. With products that require lots of interaction with physicians before a surgeon installs them, though, the past few years have been extra challenging.
Now that healthcare systems are more or less back to normal, total revenue is on the rise. Total sales during the company's fiscal second quarter that ended Oct. 27 rose 5.3% year over year.
Medtronic needed 90% of the free cash flow it generated over the past year to meet its dividend commitment, but the company is still a long way from needing to reduce its payout. In fiscal 2024, the company expects adjusted earnings to land in a range between $5.13 per share and $5.19 per share, which is heaps more than necessary to cover a dividend currently set at just $2.76 annually.
Shares of Medtronic offer a nice 3.4% yield at recent prices and probably much more once you're ready to retire. With plenty of new devices to sell, and the industry's largest salesforce to sell them, at least another decade of dividend growth seems likely.
AbbVie
AbbVie (ABBV 0.29%) was the biopharmaceutical arm of Abbott Laboratories before it spun out on its own in 2013. Rising sales of top-selling drugs helped the company continue its parent's decades-long annual dividend-raising streak at a much faster pace.
NYSE: ABBV
Key Data Points
Shares of AbbVie offer a 3.8% yield at recent prices, and investors will be glad to know it's raised its payout by a stunning 287% over the past decade.
AbbVie's lead drug at the moment, Humira, lost patent-protected market exclusivity in the U.S. about a year ago. During the first nine months of 2023, U.S. sales of the anti-inflammatory injection sank 30% year over year to $9.4 billion, and this revenue stream will contract much further. In the E.U., where Humira lost exclusivity in 2018, Humira sales were just 1.7 billion during the first nine months of 2023.
In years past, AbbVie invested Humira revenues wisely. Now, it has a handful of huge growth drivers that can more than offset Humira's losses. During the first nine months of 2023, Rinvoq, a tablet for arthritis, and Skyrizi, an injection for psoriasis, grew combined sales by more than 50% year over year to a combined $8.1 billion. Both these blockbusters launched in 2019, so it will be a long time before their sales stop climbing due to a loss of market exclusivity.
Medtronic doesn't have extra profits it can use to raise its payout any faster than overall profit growth, but AbbVie does. The drugmaker needed just 42% of the free cash flow it generated over the past year to meet its dividend commitment.
AbbVie will more than likely limit its dividend raises until U.S. Humira revenues find a bottom. With Rinvoq and Skyrizi pushing total sales to new heights, its payout could still grow by leaps and bounds in the decade ahead.
