The science that backs healthcare breakthroughs is mind-bogglingly complex. If you don't specialize in the medical space, you should probably avoid small, research-driven healthcare stocks. But that doesn't mean you shouldn't buy healthcare industry giants like Medtronic (MDT 0.11%) and Merck (MRK -1.91%).
Even if you only have a small amount of funds available to invest (say $200), these affordable dividend payers should be on your radar today as buy-and-hold stocks. Here's why.
Why go with giants like Medtronic and Merck?
Tiny healthcare start-ups, like biotech companies, often have incredibly exciting technology backing their businesses. And if that technology pans out as hoped, the stocks can turn into huge winners. But there's always the risk that the expected medical breakthrough doesn't actually work out as expected. When that happens, healthcare companies can go out of business, leaving stockholders with nothing.
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This is why experts in healthcare and science are probably the only traders who should be looking at tiny healthcare companies that often have only one make-or-break product. But industry giants like Medtronic, in medical devices, and Merck, in pharmaceuticals, are a different breed. They already have large portfolios of successful products. And they have large and well-funded research and development teams to develop new products.
However, the really important differentiator is the acquisition of smaller businesses. Medtronic and Merck are both big enough to buy smaller companies with exciting new technologies. These technologies often complement existing products that each company already owns. Or it allows them to break into a new market. The key is that Medtronic and Merck have strong businesses, and they supplement that strength by acting as industry consolidators. You don't have to be up to date on all of the science because Medtronic and Merck are doing that for you.
What's to like about these buy-and-hold healthcare giants?
The first thing that a dividend investor will like about Medtronic and Merck is their yields, at 3.2% and 4%, respectively. The average healthcare stock has a dividend yield of around 1.8%, while the S&P 500 index's (SNPINDEX: ^GSPC) yield is a skinny little 1.3%. So these are attractive income generators in a sector and market that isn't generating a lot of income for investors.
Second is the dividend record. Medtronic has increased its dividend for a huge 48 consecutive years. That's just two years shy of Dividend King status. Merck's streak is up to 15 years, but it has a long history of offering a progressive dividend, even though it doesn't increase the dividend every single year. That's not as impressive a story, but it is a clear demonstration that the board sees the dividend as highly important.
The third big reason to buy and hold Medtronic and Merck forever is more fundamental. Healthcare isn't optional. You have to seek out medical care when you are ill. And as you age, you'll likely need more medical care. These two facts make these reliable dividend stocks into necessity businesses. Both have diversified product portfolios and a long history of adjusting along with healthcare technology advances. They are no-brainer buys for dividend investors today.
What will $200 get you here?
Medtronic and Merck are well-known companies, and their stock prices are a bit lofty. A $200 investment will get you two shares of Medtronic or two shares of Merck (or one share of each). That may not seem like a huge deal, but it gets you in on the ground floor of healthcare businesses that have proven themselves to be reliable income stocks and long-term success stories in a very competitive and complex industry.
