When looking for the best dividend stocks, it’s usually best to not chase the highest dividend. Looking for quality dividend stocks with decent yields is usually a better recipe for large overall returns. Capital appreciation combined with a dividend can produce outsized returns.
Here are my top two picks for big pharma dividend stocks.
An oldie, but goodie
Technically, Johnson & Johnson (NYSE:JNJ) isn’t a pure pharma since it also sells medical devices and consumer health products, but it’s that diversity that makes it such a stable dividend stock.
The company has a history of raising its dividend for more than half a decade. In April, Johnson & Johnson (NYSE:JNJ) announced an 8.2% increase of its dividend, the 51st consecutive increase.
AbbVie Inc (NYSE:ABBV) is the only pure pharma in the Dividend Aristocrats club, which requires 25 consecutive years of dividend increases. The six-month-old company is in the index because it spun out of Abbott Laboratories (NYSE:ABT), which was in the index before the split. Even Abbott technically cut its dividend because it lost a substantial amount of its cash flow from AbbVie Inc (NYSE:ABBV)’s drug. Still, I think the S&P let them stay in the index simply because there are so few health care companies in the Dividend Aristocrats.
You can go through each division of Johnson & Johnson (NYSE:JNJ)’s earnings statement looking for growth and areas of concern, but I think taking a holistic approach to analyzing the company, while counting on the history repeating itself, seems like a reasonable approach if you’re planning on buying and holding for years or even decades.
Solid pipeline
Bristol Myers Squibb Co. (NYSE:BMY) doesn’t have a long history of increasing its dividend, but it has been slowly raising its dividend over the last five years. The current dividend yield of 3.1% is pretty solid.
What I like about Bristol Myers Squibb Co. (NYSE:BMY), though, is its pipeline. There are six compounds in their final stage of clinical testing or already being reviewed by regulatory agencies. More importantly, the earlier stages are packed with a whopping 39 compounds!
Not all of those are going to pan out, but it only takes a few drugs to move the revenue needle, especially now that Bristol Myers Squibb Co. (NYSE:BMY) is smaller after losing exclusivity on Plavix.
One that investors should keep their eye on is cancer treatment nivolumab. In a recent phase 1 trial, 53% of melanoma patients responded to a combination of nivolumab and another Bristol drug called Yervoy. All of the responders saw at least 80% tumor shrinkage, which is pretty substantial and should translate into extended survival.
While success in the phase 3 trial seems probable, Bristol Myers Squibb Co. (NYSE:BMY) is likely to see competition from Roche’s MPDL3280A and Merck & Co., Inc. (NYSE:MRK)‘s MPDL3280A, which work using the same mechanism of action. Fortunately, the target of the drugs appears to be conserved across a wide range of tumor types, so there should be plenty of room for all three drugs.
Cherry on the top
Sometimes people say they’re dividend investors and then focus solely on the dividend aspect of the stocks they invest in. That seems to be the wrong approach, especially in the pharmaceutical sector where patent expirations and pipelines will drive capital appreciation of the dividend stocks and even the company’s ability to pay the dividend.
The article Top Dividend Stocks in Big Pharma originally appeared on Fool.com and is written by Brian Orelli.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson (NYSE:JNJ). The Motley Fool owns shares of Johnson & Johnson.
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