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5 Healthcare Stocks for Dividend Lovers

By Brian Feroldi - Jun 17, 2015 at 8:04AM

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Here are five dividend-paying stocks you should considering adding to your watchlist.

Photo by Simon Cunningham Follow Flickr Creative Commons

This article was originally published on June 17th, 2015 and has since been updated on January 15th, 2016 to reflect updated information. 

Buying and holding dividend-paying stocks has proven to be a terrific strategy for long-term investors. Companies with the ability to raise their dividends over time can become reliable sources of income for shareholders. 

The healthcare industry can be a great place to find dividend-paying companies since healthcare spending tends to be recession-resistant. This allows companies with strong competitive positions to continue to pay out strong dividends, even if the economy takes a turn for the worse.

When looking at a particular company to see if it could make for a good dividend investment, I like focus on a few key metrics: dividend yield, dividend growth, and the free cash flow payout ratio.

With this in mind, here are five dividend-paying companies worthy of consideration:

1. Amgen (AMGN 0.93%)
You wouldn't naturally think of a biotech company as a dividend payer, but Amgen isn't just any biotech. Amgen started paying a dividend in 2011 and has been raising it quickly. In fact, the dividend has grown so quickly that it now offers investors a yield of 2.7%, which is higher than the overall market.

Amgen has been working to extend the useful life of its top-selling drugs, and it was successful with Enbrel in securing a patent extension until 2029. More evidence of this strategy can be found in the case of Neupogen, Amgen's blockbuster white blood cell booster. Neupogen lost patent protection in 2013, but a longer-lasting version called Neulasta will have exclusivity until October of this year. However, the company also launched an on-body injector for Neulasta as a way to clinically differentiate the drug and hopefully retain market share even after biosimilar competition is introduced. Amgen could also one day be a big player on the other side of the biosimilar drug market, as they have 9 biosimilar drugs in development that will compete for market share with drugs currently pulling in $52 billion annually. 

Beyond its more mature products, Amgen recently launched two new drugs that hold massive potential. Repatha, a next-generation LDL-cholesterol-lowering drug, and Kyprolis, a multiple myeloma medication, are each staring down large market opportunities and should keep Amgen's top and bottom lines moving in the right direction. 

Over the last three years Amgen dividend has grown by an average of 25% per year, and since the dividend is currently consuming only 30% of the Amgen's free cash flow, there is plenty of room left for the dividend to grow from here. 

2. Gilead Sciences (GILD 0.89%)
Gilead has been a monster winner in recent years, as newly launched Hepatitis C drugs Sovaldi and Harvoni had been some of the most successful drug ramp-ups of all time. As a result, revenue at the company in 2015 is expected to grow by more than 29% and profits are expected to leap by more than 50%! Given that the company estimates that less than 10% of patients that have Hepatitis C in the U.S. have received treatment the odds look favorably that the company will be able to continue to grow for years to come. 

Gilead only recently became a dividend paying stock, having initiated its first payout in February 2015. New dividend-paying stocks don't tend to have high yields, so seeing a dividend yield of only 1.88% isn't much of a surprise.

We don't have any history to look at to asses how quickly the dividend might grow from here, but the current payout of $0.43 per quarter translates into an annual cost of only $2.5 billion to the company. That may sound like a big number, but Gilead generated more than $17.7 billion in free cash flow over the past 12 months giving the company an extremely low 14% cash payout ratio. Like Amgen, Gilead Sciences can easily afford to raise its dividend from here, which make Gilead a great choice for dividend focused investors. 

3. Johnson & Johnson (JNJ 1.13%)
It's hard to think about dividends and healthcare and not have Johnson & Johnson immediately come to mind. With 265 different operating companies in its vast empire the company is a bonafide healthcare conglomerate, which gives its business tremendous stability.
The company services its revenue from 3 main segments: consumer, pharmaceuticals and medical devices. While all three divisions hold potential, I think that its pharmaceutical business looks especially promising. Johnson & Johnson is still in the early innings on several recent product launches which look poised for growth, and right behind them it has an an additional 10 drugs waiting in its pipeline that it believes could eventually reach more than $1 billion in peak sales. As those drugs find their way on pharmacy shelves across the world the company's revenue is bound to continue to rise.
Johnson & Johnson currently offers a yield of 3% and it has grown its dividend by more than 6% per year for the past five years, which makes for a nice combination of a strong current yield mixed with decent growth. Johnson & Johnson has a 53 year streak running of uninterrupted dividend increases, and since its dividend only consumes about 53% of its free cash flow the odds look very good that it will be able to continue to grow its dividend for years to come.
4. Novartis AG (NVS -0.20%)
Novartis isn't a company I hear many dividend-focused investors talk about much, which could be because it's based out of Switzerland. However, with a market cap of more than $190 billion Novartis is a true healthcare giant, and its current 2.6% yield is nothing to sneeze at.
Like Johnson & Johnson, Novartis breaks down its business into three main operating units: Branded pharmaceuticals, generics and biologic drugs, and surgical and pharmaceutical products related to eye care.
While Novartis' pharmaceutical division is growing very slowly, the company's generic division, Sandoz, is growing quickly worldwide and it made waves in 2015 when when it announced that the FDA had approved Zarxio, a biosimilar of Amgen's billion-dollar drug Neupogen, for sale. That approval cleared the runway for a wave of biosimilar competition in the U.S., and Sandoz is in a prime position to capitalize as it currently counts several drugs that are in phase 3 trials that could eventually become biosimilar competition for multibillion-dollar drugs like Humira, Rituxan, and Neulasta. All in all, the company plans to file 10 major biosimilars for regulatory approval in the coming three years, which could be a major tailwind to the company's growth. .
Novartis sports a cash payout ratio of 62% at the moment, which is the highest number among the companies profiled here, but is still low enough to leave plenty of room for management to continue to grow the dividend over time.
5. Novo Nordisk (NVO 0.19%)
Novo Nordisk is another healthcare giant headquartered overseas; the diabetes-focused powerhouse calls Denmark home. Growth around the world remains strong for Novo Nordisk thanks to its leading position in diabetes, a disease that afflicts an estimated 400 million patients around the world. Novo Nordisk offers many different drugs that help people with diabetes manage their disease, such as its insulin Levemir and its GLP-1 drug Victoza, and it has a handful of drugs currently pending regulatory approval that should help it continue to grow in the years ahead.
Novo Nordisk has been paying a growing dividend for decades, and while its present yield of 1.44% yield may not sound terribly appealing, the company's five-year annual growth rate of 34% should grab your attention. Better yet, the dividend is only consuming about 41% of the company's free cash flow. With analysts projecting that the company will be able to grow its bottom line by 15% over the coming five years, the odds are good that its its dividend will continue its strong growth in the years ahead.

Which is the best buy right now?
If yield is your priority, it's hard to go wrong choosing Johnson & Johnson. Its 3% yield is the highest among the companies I highlighted here its moderate payout ratio give its management team room to continue raising it in the years to come.

However, if you're willing to sacrifice a little yield in order to capture some more growth, Gilead Sciences is my favorite investment on the list. Alongside its recently announced dividend, the company has a massive $15 billion share repurchase program under way, which, along with its fast-growing products on the market and promising drugs in the pipeline, should help to juice earnings per share for years. I think of the dividend as icing on the cake, and it's just another reason I think Gilead is a great buy right now.

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Stocks Mentioned

Novartis AG Stock Quote
Novartis AG
$84.36 (-0.20%) $0.17
Amgen Inc. Stock Quote
Amgen Inc.
$245.55 (0.93%) $2.25
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$62.36 (0.89%) $0.55
Novo Nordisk A/S Stock Quote
Novo Nordisk A/S
$111.64 (0.19%) $0.21
Johnson & Johnson Stock Quote
Johnson & Johnson
$179.52 (1.13%) $2.01

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