It can be difficult to decide which dividend stocks to buy. After all, more than 5,700 of them trade on U.S. stock exchanges.
However, three Motley Fool contributors think they can make the decisions easier. They believe that three dividend stocks are no-brainer buys right now -- and all three are big healthcare stocks. Here's why they picked Johnson & Johnson (JNJ +0.43%), Novartis (NVS 0.46%), and Pfizer (PFE +1.65%).
Look beyond the legal and regulatory troubles
Prosper Junior Bakiny (Johnson & Johnson): There is no denying that Johnson & Johnson has an incredible dividend record. The company has raised its payouts for 62 consecutive years, making it a Dividend King. However, some might argue the stock is no longer a good pick for income investors. Johnson & Johnson has encountered legal troubles in the form of thousands of lawsuits regarding its talc-based products, which, some plaintiffs allege, gave them cancer.
That's on top of the U.S. government's newly acquired regulatory authority to negotiate the prices of certain drugs. Some of Johnson & Johnson's medicines have already been targeted, and it will result in lower revenue for the company from these products.
NYSE: JNJ
Key Data Points
However, Johnson & Johnson remains a no-brainer dividend stock. Despite its legal issues, it has maintained its AAA rating from Standard & Poor, the highest credit rating available, and a sign of the strength of its balance sheet. Johnson & Johnson can take care of its financial obligations. That's the clear message. Further, the drugmaker has moved closer to solving its legal issues with a proposed solution via a subsidiary that will put more than 99% of these lawsuits to bed.
Most plaintiffs are already on board, so even if it isn't a done deal, it's moving in that direction. Lastly, Johnson & Johnson should succeed in navigating the new regulatory regime in the U.S. For one, the company has a strong medical device unit that grants it some diversification. It isn't solely dependent on its pharmaceutical business. Second, Johnson & Johnson has survived and thrived through many regulatory changes that directly affected its business over 100 years of history.
Expect the company to find ways to get around this issue in the long run. In short, Johnson & Johnson's underlying business remains strong -- and its dividend program about as safe as they come -- despite its recent headwinds. The stock is still an excellent pick for income-oriented investors.
Novartis is a dependable, high-yielding stock to own for years
David Jagielski (Novartis): Swiss pharma stock Novartis pays a high yield, offers steady growth, and is priced reasonably, making it a potential ideal option for income-seeking investors. At 3.5%, its dividend yield is more than twice the S&P 500 average of 1.3%. The company has increased its payout for 28 straight years and with a payout ratio of around 64%, there's still room for even more rate hikes in the future, especially as Novartis' growth continues.
NYSE: NVS
Key Data Points
What's appealing about the business is that it's going after sustainable and modest single-digit growth of around 5% per year, through to 2029 (at constant exchange rates); it isn't taking on big risks and swinging for the fences. The company has a robust pipeline with more than 100 projects ongoing, spanning multiple therapeutic areas, including oncology, immunology, neuroscience, and others. Meanwhile, the business already has many high-growth products in its portfolio, including heart medication Entresto, which generated 31% revenue growth last year.
Novartis may not be the flashiest stock, but that can make it an underrated buy as it trades at just 13 times its projected future earnings (based on analyst forecasts). With a modest valuation, investors are getting a good margin of safety with the stock while locking in a fairly high yield. If you're a dividend investor in search of a high payout that's safe and growing, Novartis looks like a no-brainer buy right now.
An ultra-high-yield dividend stock that's a bargain
Keith Speights (Pfizer): You won't find many dividend stocks in the healthcare sector with a juicier dividend than Pfizer. The big drugmaker's forward dividend yield is an ultra-high 6.5%. Is this dividend in jeopardy of being cut? Nope. Pfizer's management plans to maintain and grow the dividend payout.
NYSE: PFE
Key Data Points
I think Pfizer will be able to deliver on this commitment. The company already has a solid track record of dividends -- 345 consecutive quarterly dividend payments and 16 years in a row of increasing the dividend.
More importantly, Pfizer should have the products needed to generate sufficient free cash flow to keep the dividends flowing and growing. Sure, the company's COVID-19 sales have plunged. And, yes, Pfizer faces a looming patent cliff with several top-selling products losing exclusivity. However, the big drugmaker also has multiple strong growth drivers, notably including cancer drugs Adcetris and Padcev and migraine therapy Nurtec ODT.
There's another reason to buy Pfizer stock in addition to its fantastic dividend, though: valuation. Pfizer's shares trade at a forward price-to-earnings ratio of 9.07. Its price-to-earnings-to-growth (PEG) ratio is a super-low 0.18, according to LSEG. If Pfizer can deliver only modest growth (which I think it can), this ultra-high-yield dividend stock is a bona fide bargain.
