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.
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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:
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 while its current 2% yield might not sound very high, you should be excited at how quickly the dividend is growing.
Amgen has been working to extend the useful life of its top-selling drugs, and it was successful withEnbrel in securing a patent extension until2029. 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 thebiosimilar drug market, as they have 9 biosimilar drugs in development that will compete for market share with drugs currently pulling in $52 billion annually.
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Over the last three years, the dividend has grown by 33% per year, and since the dividend is currently consuming only 26% of the Amgen's free cash flow, there is plenty of room left for the dividend to grow from here.
2. Gilead Sciences
Gilead has been a monster winner in recent years, as newly-launched Hepatitis C drugs Sovaldi and Harvoni had some of the most successful drug ramp-ups of all time. As a result, revenue at the company more than doubled last year, and profits nearly quadrupled!
Gilead is the newcomer to this dividend list, having only initiated its dividend in February of this year. New dividend-paying stocks don't tend to have high yields, so seeing a dividend yield of only 1.46% 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 $12 billion in free cash flow in 2014, giving the company an extremely reasonable 21% cash payout ratio. Like Amgen, Gilead can easily afford to grow its dividend quickly, which could turn Gilead into a great dividend investment.
3. Johnson & Johnson
It's hard to think about dividends and healthcare and not have Johnson & Johnson immediately come to mind. Like so many other multinationals, the company's recent results have been affected by currency movements, but operationally the company appears to be doing just fine. The pharmaceutical division in particular seems to be doing quite well, driven by great results from their oncology and cardiovascular/metabolism divisions.
The stock currently yields 3% and has grown by nearly 7% per year for the past five years, which makes for a great combination of a strong current yield mixed with decent growth. Considering the dividend consumes 57% of the company's free cash flow in a growing business, it looks like Johnson & Johnson should be able to continue to grow its dividend for years to come.
4. Novartis AG
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, Novartis is a true healthcare powerhouse, and its current 2.6% yield is nothing to sneeze at.
While Novartis' pharmaceutical division is growing very slowly, the company's generic division, Sandoz, is growing quickly worldwide. Better yet, Sandoz recently gained FDA approval for the first ever biosimilar drug in the U.S., which should allow the company to continue its winning ways.
The company has also managed to grow its dividend at a faster rate than Johnson & Johnson, coming in at a 9% annual growth rate over the past five years. Novartis sports a cash payout ratio of 63%, 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
Novo Nordisk is another healthcare giant headquartered overseas; the diabetes-focused powerhouse calls Denmark home. Growth around the world remains strong for Novo, driven in large part by the success of their modern insulins like Levemir and their fast growing GLP-1 drug Victoza.
The company has been paying a growing dividend for decades, and while its present yield of 1.3% yield may not sound terribly appealing, the company's five-year annual growth rate of 35% should grab your attention.
Better yet, the dividend is only consuming about 40% of the company's free cash flow, which gives it plenty of room to continue growing its dividend strongly 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, and the company still has plenty of room left to continue to raise that dividend in the years to come.
However, if you're willing to sacrifice a little yield in order to capture some more growth, Gilead 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.
The article 5 Healthcare Stocks for Dividend Lovers originally appeared on Fool.com.
Brian Feroldi has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences and Johnson & Johnson. The Motley Fool owns shares of Gilead Sciences and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.