The S&P 500 has a miserly yield of 1.2%. The average healthcare stock's yield is about 1.8%. Compared to that, Merck's (MRK 0.43%) roughly 4% yield is highly attractive. And LTC Properties' (LTC 1.34%) 6.5% yield is downright magnificent. Here's why these two high-yield healthcare stocks might be the right buys for your portfolio.
Merck is facing a wall of worry
Merck's stock price is down near its 52-week low, which helps explain the lofty dividend yield. The interesting thing here is that nothing shocking is going on to justify the price drop, especially if you step back and look at the big picture. Merck has faced down similar problems to the ones it currently faces, continued to support its dividend, and worked through the problem in time.
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A lot of the issue is about the pharmaceutical sector's natural dynamics more than anything else. Large drug companies like Merck have to find drug opportunities, research them, develop a product, and then bring that product to market, including getting the necessary regulatory approvals. It is costly and time-consuming to do all of this, which is why drugmakers are given a period of time in which they have exclusive rights to sell the drugs they develop. But once the patents expire, companies like Merck have to find new drugs to replace revenue as generic versions of blockbuster drugs start to take over. Merck has gone through this cycle many times, and it will go through it again many times.
Merck is one of the largest pharmaceutical companies on the planet. It has top-notch R&D skills and the scale to buy up smaller competitors with novel drug candidates, if it needs to. That said, right now Keytruda is a key revenue source for Merck, but it is facing a patent cliff in a few years. The company's pipeline of new products is less than exciting. And, thus, investors are worried, perhaps rightly so. But, if you can think long term, Merck's history suggests it will find a way to muddle through while continuing to reward dividend investors well. Now, while everyone else is selling, could be a good time to buy.
LTC Properties is gearing up for growth
LTC Properties is also trading near its 52-week lows. But the issue with this senior housing real estate investment trust (REIT) isn't a one-year problem. The company's tenants were hit hard by the coronavirus pandemic at the turn of the decade. (Some of its lessees are still struggling.) What's impressive here is that, unlike some of its larger peers, LTC Properties muddled through that period without cutting its monthly pay dividend. The yield is a huge 6.5% today!
A lot has changed since the worst of the pandemic, but there is still one very important constant. There is going to be a large increase in the number of older adults in the years ahead. Older adults need far more medical care, and help with daily living needs, than younger adults. It is highly likely that LTC Properties is going to see increasing demand for the properties it owns.
One thing that has changed since the height of the pandemic, however, is that LTC Properties is now investing in SHOP assets. These are senior housing properties that the REIT both owns and operates (technically it hires a management company). Thus, the revenues and costs flow directly onto LTC Properties' income statement. If the graying population wave leads to more demand for senior housing, as expected, this REIT is likely to see stronger growth than it has historically. And that makes it worth a deep dive right now for those with an income focus, while other investors are still viewing it in a negative light.
Don't sleep on these magnificent opportunities
There are clearly risks involved with buying LTC Properties and Merck right now. The REIT could find that troubled tenants are too big a headwind to deal with and end up cutting its dividend. Merck, the lower-risk option here, could arrive at its upcoming patent cliff without a replacement for the revenue that gets siphoned away by generics. However, history suggests that these two high-yield stocks know how to muddle through hard times while continuing to reward investors with reliable dividends. That makes them both worth a deep dive right now.
