When it comes to dividend income, there are few industries more sought after than pharmaceutical stocks. More specifically, investors tend to focus on the 11 largest companies by market cap in pharmaceuticals because they're likely to have established product portfolios, deep drug development pipelines, and significant cash flow that allows them to pay dividends regularly higher than the S&P 500 average of 2%.

In fact, of the 11 largest companies by market cap in pharmaceuticals, there is only one with a dividend yield lower than 2.2%, and the combined operating cash flow of these 11 companies over the trailing-12-month period equaled -- get ready for this -- $95.9 billion!

Many different pills and capsules on a blue background, with some of the pills crushed

Image source: Getty Images.

The biggest pharmaceuticals by market cap
The 11 largest companies by market cap in pharmaceuticals are:


Market Value

Dividend Yield

Johnson & Johnson (NYSE:JNJ)

$279 billion



$240.8 billion


Pfizer (NYSE:PFE)

$211.6 billion


Merck (NYSE:MRK)

$163.9 billion


Novo Nordisk

$143.3 billion



$130.7 billion


GlaxoSmithKline (NYSE:GSK)

$113.1 billion


Bristol-Myers Squibb 

$108.5 billion



$91.9 billion



$88.5 billion


Eli Lilly (NYSE:LLY)

$78 billion


Source: Yahoo! Finance.

The result of this exorbitant cash flow is ample benefits for shareholders. As you can tell above, pharmaceuticals give investors significant dividend income, which can potentially be supercharged by reinvesting your dividend right back into more shares of pharmaceutical stocks.

In addition to healthy dividends, the pharmaceutical sector is known for big share buybacks. Share repurchases help lower the number of shares outstanding and can have a beneficial effect on a company's earnings per share, or EPS. If a company's EPS is boosted by fewer shares outstanding, it could make the company appear cheaper on a valuation or comparative basis and lead to its share price rising.

Pfizer, for example, has been one of the biggest proponents of returning money to its shareholders over the past four years. With nearly $12 billion in share repurchases and dividends paid in 2014, Pfizer has now returned close to $65 billion to its shareholders over the past four years.

Just because they're big doesn't mean they're slam-dunk investments
Even though these pharmaceuticals are rife with cash, they are far from being without risk.

For example, the patent cliff has been wreaking havoc on pharmaceuticals. A good example here is GlaxoSmithKline, which has enjoyed robust profits from its long-term COPD and asthma maintenance therapy Advair/Seretide. An $8 billion-per-year drug, Advair has already lost patent protection in the U.S., but it has yet to face any real competition since the FDA took its time spelling out to generic drug developers what it would look for in a generic replacement. However, a generic version of the inhalable drug is expected in 2016, meaning Glaxo can probably kiss a substantial portion of its revenue goodbye fairly soon. In fact, looking a few years down the road, I have to question whether GlaxoSmithKline can even maintain its current dividend payout, let alone grow it.

Another problem has been weak organic performance in addition to patent exclusivity losses. Eli Lilly has already lost patent exclusivity on cancer drug Gemzar, schizophrenia drug Zyprexa, osteoporosis drug Evista, pain drug Cymbalta, and diabetes product Humalog... and that's just since 2010. On top of these losses, Eli Lilly's late-stage Alzheimer's therapy solanezumab missed its primary endpoint in 2012 (although it's being studied in a long-term trial for its effect on early-stage Alzheimer's disease), its late-stage lymphoma hopeful enzastaurin met a similar fate in 2013, and last year, tabalumab, the company's lupus drug hopeful, was scrapped (after previously failing in a rheumatoid arthritis trial as well, mind you). 

Finally, there are concerns about whether or not these drug development pipelines can deliver multiple blockbusters as in years past. Here, I'd point to a pharmaceutical such as Merck, which is sitting on a potential gold mine with anti-PD-1 cancer immunotherapy drug Keytruda. This new pathway of cancer-fighting agents works by enhancing a cancer patient's immune system to help it better recognize and destroy cancer cells.

At the moment, Keytruda is only approved by the FDA as a last-line treatment for metastatic melanoma, but it's being tested in about 30 different indications as both a monotherapy and a combination therapy. Its sales potential could very well be in excess of $5 billion.

But, one drug likely can't carry Merck's pipeline. When looking at what's in line behind Keytruda, I struggle to see how Merck will continue to grow its top line.

Big Pharma's shining star
The largest companies by market cap in pharmaceuticals may offer plenty of shareholder incentives, but as you've seen above, they're not invulnerable. One company, though, does appear to stand head and shoulders above its peers: Johnson & Johnson.

Johnson & Johnson isn't just a traditional pharmaceutical company -- it's actually one of the world's largest medical device makers, too, and it has a large personal health products segment. Health products and even medical devices aren't particularly quick-growing segments, but they provide either strong pricing power (personal health products) and a rosy long-term outlook as the U.S. population grows and ages (medical devices).

Data through Q2 2014. Source: Johnson & Johnson. 

Make no mistake about it: J&Js pharmaceutical segment is where its juicy margins and profit growth are generated. Since 2009, and through mid-2014, Johnson & Johnson has introduced 14 new molecular entity drugs to market that resulted in $12.5 billion in cumulative sales. These include Imbruvica, a blood cancer drug with remarkable efficacy that it co-developed with Pharmacyclics, and Invokana, a new type of diabetes therapy known as an SGLT2 inhibitor that works in the kidneys to block glucose absorption and allows type 2 diabetics to rid excess glucose through their urine.

With plenty of high-growth therapeutic fields represented in its product portfolio and a 52-year streak of dividend increases, this is the shining star of all pharmaceuticals that deserves your attention.