Dividend stocks can be a great addition to your portfolio, especially pharmaceutical dividend stocks that offer a bit of stability in rocky times. People still get sick during recessions.
And the dividend allows investors to be patient, collecting the dividend while they wait for drugs to be developed. Drug development certainly isn't a linear path.
The trick to buying dividend stocks isn't to look for the ones with the highest yield. Dividends aren't guaranteed, and when dividends are really high, there's often a reason investors are demanding a higher yield: They're worried about the underlying stock.
For instance, GlaxoSmithKline's (NYSE:GSK) dividend yield is around 4.5%. The pharma faces a major patent cliff, with many of its top-selling drugs facing generic competition fairly soon. Investors require the higher dividend yield to justify owning shares since they know the underlying stock price might not go anywhere.
Instead, look for solid companies with strong underlying business, which will ultimately affect not only the stock price, but also the company's ability to pay its dividend. Here are two dividend stocks worthy of consideration.
An oldie but a goodie
Johnson & Johnson (NYSE:JNJ) has increased its dividend for 51 consecutive years. Just last week, the company bumped its dividend 8.2% from $0.61 per share each quarter to $0.66 per share. Nothing is guaranteed, but it would take a major disruption in Johnson & Johnson's business before the health-care giant would cut its dividend. They don't make dividend stocks much more solid than that.
Analyzing Johnson & Johnson's underlying business isn't as black and white, but Johnson & Johnson stock sure looks like it's on a comeback thanks to a recovering over-the-counter business and solid growth from new drugs, including hepatitis C drug Incivo, which the health-care giant sells abroad for Vertex Pharmaceuticals (NASDAQ:VRTX); Johnson & Johnson's sales of Incivo, which goes by the name Incivek stateside, were up 17% quarter over quarter. Vertex will get a piece of the $162 million sales in the form of a royalty.
Dividend stock on the mend
After cutting its dividend in half when it acquired Wyeth in 2009, Pfizer (NYSE:PFE) has increased its divided steadily over the last few years. Pfizer stock has shot up more than 40% over the past year and a half.
Pfizer had a rough first quarter, revenue was down 9% and adjusted income fell 10%. The only saving grace was a share buyback -- $6.3 billion so far this year -- which reduced the share count, so adjusted earnings per share only fell 5%. The decline was to be expected with Lipitor going off patent, so I'm not sure exactly why investors look so shocked. Perhaps they thought it could continue on its run forever.
At the knocked down price, Pfizer isn't a steal, but it looks like a solid dividend stock that you can buy and forget -- at least until you're reminded that you own the stock when the next dividend hits your brokerage account.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Vertex Pharmaceuticals and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.