Contrary to popular opinion, if you're looking for mouth-watering dividend stocks, you'll want to check out the healthcare sector. Healthcare spending makes up nearly one-fifth of the U.S. economy and doesn't seem likely to lose steam anytime soon.
Healthcare companies often don't pay out dividends (which can be positive overall since they usually plow the money back into research), but some pay out nice yields. However, not every dividend yield is quite as good as it might seem. Here are three healthcare stocks that have tantalizing -- yet potentially risky -- dividends.
GlaxoSmithKline plc (GSK -0.68%)
There aren't many stocks in any industry that can boast a higher dividend yield than GlaxoSmithKline. The drugmaker's forward yield currently stands at 5.8%. Over the last five years, Glaxo has averaged an annual dividend yield of 5.1%.
The big drugmaker is a leader in the vaccine market, particularly with children's vaccines including Infanrix and Pediarix. Glaxo claims several respiratory drugs that generate lots of revenue, most notably the blockbuster drug Advair.
What's not to like? For one thing, the tempting dividend doesn't look as appealing over the past year with Glaxo's shares dropping 15%. The big pharmaceutical company has stumbled on multiple fronts, from a scandal in China to a big clinical trial failure. Sales for several top drugs, including Advair, are on the decline. Over the last 10 years, Glaxo's stock is down by nearly 2%, while the S&P 500 index is up close to 75%.
Dividend investors can probably live with sub-par performance if they can count on steady dividend payouts, though. Glaxo CFO Simon Dingemans has told investors that "the dividend remains our priority" even with a sky-high payout ratio of 151%. However, the company could face pressure to trim the dividend in the face of diminishing earnings. For the immediate future, Glaxo's dividend seems relatively safe -- but don't discount the possibility of cuts down the road.
Computer Programs and Systems (CPSI 0.10%)Healthcare technology stocks usually don't stand out for their impressive dividends. Rural hospital technology developer Computer Programs and Systems, however, is definitely an exception. CPSI's forward dividend yield of 4.8% proves the point.
However, like GlaxoSmithKline, CPSI hasn't excited investors lately. The stock is down 23% over the past 12 months. Unlike Glaxo, though, CPSI outperformed the broader market during the last decade -- thanks in large part to growing sales resulting from federal incentives given to hospitals to adopt electronic medical record systems.
The bad news for CPSI is that those incentives end in 2016. Earnings have taken a hit as many rural and community hospitals have already implemented EMR systems. CPSI made a good diversification move a couple of years ago by launching TruBridge to provide business services and consulting to the market. However, the end of federal money for hospitals to buy electronic health record systems will hurt.
CPSI's dividend payout ratio currently stands at 78%. That's a figure that the company's management knows is high. However, CPSI appears to be committed to keeping the dividend payments flowing.
Meridian Bioscience (VIVO -1.06%)Dividend-seeking investors might also want to check out diagnostic test kit developer Meridian Bioscience. The company sports a forward dividend yield of 4%. Meridian has also averaged paying out a 4% yield over the past five years.
Meridian's illumigene molecular products have seen solid growth. This diagnostics system can be used to test for several conditions such as peptic ulcer diseases and streptococcus. The company boasts the only FDA-cleared stand-alone molecular assay for bordatella pertussis, which causes whooping cough.
Unfortunately, Meridian Bioscience has a couple of things in common with Glaxo and CPSI. The stock is down over the past 12 months -- but by a less-scary 5%. Meridian also claims a concerning dividend payout ratio of 95%.
Is the juicy dividend potentially at risk? For one thing, Meridian's management tries to keep dividend payouts between 75% and 85% of earnings. That could portend lower dividend payments in the days ahead.
On the other hand, the company's introduction of new products and solid financial position should give investors reasons for optimism. Meridian has seen several successful product launches recently and plans more for 2015. The company has no debt, over $49.5 million in cash, and continues to grow both revenue and earnings.
Risk vs. reward
As with nearly every other aspect of investing, finding good dividend stocks involves trading off risk against reward. Typically, higher-yielding stocks carry higher risk. That's true for all three of the stocks mentioned above. The dividends are tantalizing -- but also potentially treacherous.
However, each of these companies has a solid business model as well as a management team that prioritizes dividend payouts. So in my opinion, Glaxo, CPSI, and Meridian Bioscience should remain on the radar screen for investors looking for high dividend yields, but keep in mind that those dividends could potentially be cut down the road.