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3 Top Health Care Dividends Every Investor Needs to Know

By Dan Carroll – Mar 3, 2014 at 1:30PM

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Johnson & Johnson, UnitedHealth, and Medtronic boast great dividends, steady cash flow, and solid potential that should tantalize any long-term dividend investor's eye.

What's the smartest investors' biggest secret weapon? For those with the patience to wait for the market's long-term rewards, the power of dividends can make a big difference. Dividends especially have a strong hold in the health care sector, an industry known for the volatility of biotech stocks that can pop or plummet on a dime. Look closely, however, and you'll find some of the top dividend stocks on the market -- sporting great cash flow and a steady history of payouts.

But, which health stocks top the list that every investor needs to know? Let's take a look at three of health care's finest dividend stocks, from Medtronic's (MDT -2.13%) medical device dominance to Johnson & Johnson's (JNJ 0.05%) breadth, to pick out the stocks you need to keep on your radar.

Medtronic's Restore neurostimulator. Source: Medtronic Press Image Library.

Medtronic looks to the future
Investors don't often think of medical device stocks like Medtronic as dividend giants, but this dominant, diversified med tech firm bucks the trend.

It's not just Medtronic's breadth that makes it such a strong dividend stock, however. The company is one of the few health care stocks among the S&P 500's dividend aristocrats, a list of companies that have raised their dividends annually for at least the past 25 years. Medtronic's 2% dividend yield might not seem like much compared to some of the higher-yielding stocks on the S&P, but with a payout ratio of just 31% and sturdy cash flow, this is a company primed to keep up its run among the dividend aristocrats for years to come.

Medtronic's business isn't too shabby for growth-conscious dividend investors, as well. The company has managed to slow falling sales in hard-hit device industries such as cardiac rhythm management, where products like pacemakers have seen tough times due to fierce competition and pricing pressure at home and abroad.

Meanwhile, Medtronic's picked up the slack in growth niches such as neuromodulation -- a market that focuses around alleviating pain by electrically stimulating the nervous system, one in which the company's sales have grown steadily in recent years -- and heart valves, where Medtronic's CoreValve is poised to challenge leader Edwards Lifesciences(EW 0.18%) Sapien heart valve both at home and abroad. Edwards' device has long held the only approval in the United States, but with Medtronic's CoreValve gaining an approval in January, expect the competition to heat up.

UnitedHealth overcomes Obamacare's launch
Like Medtronic and other medical device stocks, the health insurance industry isn't a typical pick for dividend investors. However, while UnitedHealth Group (UNH -1.18%), America's largest publicly traded insurer, might lack a long history of dividend increases and boast only a 1.5% yield, it more than makes up for it in its strength, size, and forward-looking moves.

Size is strength in the insurance industry, and no one is bigger than UnitedHealth, which has done a masterful job of increasing its subscription base as of late. UnitedHealth grew its membership base by 11% in 2013 after notching 18% growth in 2012 -- astronomical figures given the company's size already. While UnitedHealth's costs have climbed, the company has kept total revenue growth in line to compensate. Most notably, UnitedHealth played the launch of Obamacare with a cautious hand.

Several large competitors dove in headfirst into the Affordable Care Act by jumping into numerous state markets, but UnitedHealth has been much more selective about its state exchange participation. With youth enrollment still questionably low and the future of Obamacare very much in flux, UnitedHealth's prudence looks like a great move to stabilize costs in the company's future.

UnitedHealth has also looked outside of the U.S. to keep up growth during Obamacare's rollout. The company's purchase of Brazilian insurer Amil back in 2012 gives it a route into a rapidly growing market and will help to counter any rising costs from the Affordable Care Act's launch. That's good news for dividend investors, as health insurance's most reliable and stable stock looks primed to continue growing its modest dividend in the near future.

Diversified health care dominance
More so than health insurance or medical devices, it's big pharma that offers up some of the highest-yielding dividend stocks in health care. Yet even though its yield is not the highest in the pharma space, Johnson & Johnson easily makes this list.

Johnson & Johnson is known across the markets for its health care dominance, but this company has been a top dividend stock for a long time. Like Medtronic, it's one of the S&P 500's dividend aristocrats, and its 2.9% dividend yield is attractive. Johnson & Johnson has also done a great job growing its business, though -- boosting its medical device segment with the acquisition of orthopedics leader Synthes while focusing on its pharmaceutical division to boost sales.

That pharma business has become Johnson & Johnson's greatest strength for dividend investors going forward. Star immunology drug Remicade is a cash cow, pulling in 8.7% sales growth last year and raking in more than $6.6 billion. Up-and-coming drugs such as type 2 diabetes therapy Invokana and J&J's blockbuster cancer-fighting drug Zytiga promise strong potential for the future to take over when Remicade's patent invariably falls.

For now, however, Johnson & Johnson has turned its pharmaceutical business into a behemoth, one that has only made its medical device and consumer businesses all the stronger for the company's breadth. For dividend investors, few big pharma giants and health care stocks offer the same amount of diversity, growth, and potential as J&J.

Three top stocks
Finding good dividend stocks isn't hard, but separating the great stocks from the rest can lift your portfolio's performance from acceptable to standout. Medtronic, UnitedHealth, and Johnson & Johnson are among the leaders in their respective industries, and each company boasts great potential to maintain their dividends into the future through size, diversification, and growth initiatives. For dividend investors, there is little more appealing than companies that are firing on all cylinders like these three great stocks.

Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool owns shares of Johnson & Johnson and Medtronic. We Fools may not 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.

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