People don't tend to skimp when it comes to life-saving procedures or medicines, and dividend-paying stocks offer insulation against turbulent markets. Therefore, investing in healthcare stocks with rising dividends could prove to be the perfect strategy for income investors hoping to weather a stormy stock market.
So, we asked three of our top Motley Fool contributors to share with us the dividend-paying healthcare stocks they think could enjoy the best dividend growth this year. Read on to learn which companies they chose.
Todd Campbell: Amgen (NASDAQ:AMGN) may not have the biggest dividend yield in the market, but it does have one of the most shareholder-friendly management teams. The company recently announced that it has increased its dividend payout for 2015 by 30%, and last fall, Amgen reported that its long-term goal is to return 60% of adjusted net income to investors through 2018. Dividends will be a big part of Amgen's plans during that period; however, Amgen also has announced that it plans to buy back $2 billion in stock this year.
Amgen's plans come on the heels of its restructuring, which began in 2013, and the company is expected to cut expenses by $1.5 billion annually. The cost savings should help margins, but Amgen could benefit from sales growth, too.
For example, the company expects an FDA decision later this year on whether or not to approve its cholesterol-busting drug evolocumab. Statins, the current cholesterol-lowering treatment, are one of the most highly prescribed drugs on the planet, and many think that PCSK9 drugs like evolocumab could become top sellers. If Amgen can roll out evolocumab and other promising drugs in its pipeline, while boosting operating margin through cost cuts, investors may discover that its 30% dividend increase earlier this year is just the start.
Dan Caplinger: From a dividend perspective, health insurance companies have a history of being stingy with their payouts. But in recent years, UnitedHealth Group (NYSE:UNH) has taken great strides in bringing its dividend yield up to more respectable levels, and 2015 is likely to continue what has turned into a five-year streak of considerably higher payouts.
Until 2010, UnitedHealth made only a token annual payout to shareholders; but that year, it instituted a legitimate quarterly dividend policy that raised its yearly amount of dividends per share from $0.03 to $0.50. Every year since then, the company has given shareholders a dividend hike of 30% or more, tripling its payout between 2010 and 2014. Net income hasn't climbed at that same pace, but UnitedHealth still pays out less than 30% of its earnings in the form of dividends.
UnitedHealth has the latitude to tap its earning power to return more capital to shareholders while still capitalizing on the monumental opportunities from Obamacare in the U.S., as well as its international expansion capabilities. With the stock yielding less than 1.5% even after its efforts to boost payouts, it's extremely likely that UnitedHealth will continue its dividend streak in 2015; the raise from its current level of $0.375 per share to $0.50 per share seems like a reasonable starting point for the health-insurance giant.
Cheryl Swanson: For a stock to deliver a substantial dividend increase, it needs a payout ratio of 50% or less, providing room for more hikes. To top it off, the firm should have a history of raising distributions and a solid earnings outlook.
Given the scarcity of good dividend payers in healthcare selling at an attractive value right now, there's a dearth of candidates for rapidly rising dividends. While Dan's pick, United Health, or Todd's pick, Amgen, are more likely to hike dividends substantially this year, I think investors with a longer-term horizon should take a look at Baxter International (NYSE:BAX).
Baxter is a personal favorite because the company is often overlooked. While the stock rose only 5.5% last year, the company grew revenue at a 16% clip, five points higher than the industry average. During the past five years, Baxter also doubled its dividend. Shares now yield an impressive 2.9%, with a payout ratio of 43%.
The bull case for Baxter lies in a major coming catalyst. Similar to the move made by Abbott Labs when it spun off its faster-growing business into AbbVie two years ago, Baxter is planning to split into a medical tech business and a biosciences company mid-year.
Two-thirds of Baxter's current revenue comes from products that are leaders in their markets, so both companies should have strong market positions for their diversified products.
Baxter more than stood its ground against Biogen's challenge in hemophilia last quarter, with hemophilia sales well above consensus estimate, despite Biogen's launch of Eloctate. While there will be disruptions to business as the company breaks apart, when the dust settles, patient investors should benefit from the higher-than-average yield and the promise of greater dividend growth to come.