The 4 Best Dividend Stocks in Pharmaceuticals

By Cory Renauer Markets Fool.com

If you're looking for steadily growing income, the pharmaceutical industry boasts plenty of dividend-paying stocks. Not all of them are created equal, though, and plenty of investors in this space have seen their payouts frozen or slashed in recent years as their leading products succumbed to generic competition.

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Luckily,Bristol-Myers Squibb Co. (NYSE: BMY), Eli Lilly and Co. (NYSE: LLY), Johnson & Johnson (NYSE: JNJ), andPfizer Inc. (NYSE: PFE) possess the right combination of outperforming products and potential growth drivers to continue to raise their distributions for many years to come. Come see for yourself why these are the best dividend stocks in big pharma you can buy now.

Not all pharmaceutical stock dividends are created equal. Image source: Getty Images.

Bristol-Myers Squibb Co.: In the bargain bin

At recent prices, shares of this pharmaceutical company offer investors a nice 2.8% yield that they can reasonably expect will keep rising for years to come. Over the past year, the company used about 57% of profits to make payments, and the company's bottom line is climbing on the back of Opdivo, a promising cancer therapy that helps patients' immune systems attack their tumors.

In recent months, Bristol-Myers Squibb stock has fallen to bargain-bin prices, largely because Opdivo failed to outperform standard chemo in a trial with newly diagnosed lung cancer patients. Although Opdivo appears unlikely to become a first-line treatment option for this large patient population, it's important to view the setback in light of the drug's impressive track record. Since earning its first approval at the end of 2014, the drug is now approved for 11 indications across six tumor types and generated sales of $3.8 billion in 2016.

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Bristol-Myers Squibb's oncology success isn't limited to Opdivo. Orencia and Sprycel both grew annual sales by double-digit percentages last year and contributed $2.3 billion and $1.8 billion, respectively, to the company's top line. Beyond oncology, the company's next-generation blood thinner Eliquis, which is marketed in partnership with Pfizer, continues to exceed expectations. Last year, sales of the anticoagulant jumped 80% to $3.3 billion.

Bristol's stable of growth drivers could push up total profits at a blazing pace for a big pharmaceutical company. The average analyst following the company expects earnings to increase at an 11.8% annual growth rate over the next five years.The company is poised to continue to grow, with 10 new immuno-oncology candidates in clinical trials across 35 tumor types.

Image source: Getty Images.

Eli Lilly and Co.: Long time coming

Although this pharmaceutical stock has frozen its dividend in recent years, it has also made a payment each year since 1885.At recent prices, the distribution offers a 2.4% yield that could grow steadily for years to come.

It raised the payout by a cautious 2% last year, but I wouldn't be surprised if it picks up the pace. The company used just 56.8% of the free cash flow it generated last year to make the last four quarterly payments, and some of its more recent launches are performing well enough to give the distribution even more room to grow.

Eli Lilly's type 2 diabetes drug, Trulicity, is climbing the charts at a mind-boggling pace right now. Sales of the GLP-1 agonist shot up to $737.6 million in 2016 from just $187.9 million a year earlier. This condition affects more than 20 million Americans, and Trulicity might not be the only major growth driver the company has in this space.Diabetes is strongly associated with higher risk of death from cardiovascular causes. Late last year, the Food and Drug Administration made Jardiance, which Lilly markets in partnership with Boehringer Ingelheim, the first type 2 diabetes drug approved to reduce the risk of death from cardiovascular disease.

Further out, the company's rheumatoid arthritis treatment called Olumiant could add more than $2 billion to Lilly's top line at its peak. It's already earned approval in the EU, but U.S. regulators have held up its review. The complete response letter issued by the FDA wants to see additional safety data before it will consider the application again.

Johnson & Johnson: A favorite for many reasons

After 54 consecutive annual raises, investors can rest easy with this stock in their long-term dividend portfolio. Although medical device and consumer good sales still comprise a slight majority of this conglomerate's total revenue, the faster-growing pharmaceutical segment will drive Johnson & Johnson's dividend growth in the years ahead.

At recent prices, J&J shares offer a nice 2.6% yield, and investors expect the 55th consecutive annual increase announcement any day now. A handful of recently launched drugs are helping the healthcare titan push the needle forward. Fourth-quarter immunology drug sales rose 6% higher than the prior-year period to $2.94 billion, led by Stelara and Simponi. The oncology department did even better during the same period, notching a 14.8% gain as drugs like Imbruvica and Darzalex contributed a combined $1.60 billion to the company's top line.

The company's legendary dividend history speaks volumes about J&J's focus on the long term, as does more than $9 billion invested in research and development last year. While the company spends more on R&D than all but a few drugmakers, it's also managed to distribute around 70% of free cash flow to investors over the past 10 years. Last year's dividend payments chewed through just 55.5% of free cash flow generated during the period, which leaves the company plenty of room to continue to treat investors to annual raises and invest in its future.

Image source: Getty Images.

Pfizer Inc.: An emerging oncology titan

At recent prices, this pharmaceutical stock offers a juicy 3.8% yield that could see some big bumps in the years ahead. The company generated a whopping $13.9 billion in free cash flow last year, and used just 52.6% of it to make dividend payments. That leaves enough room for increases even if profits tread water.

Luckily, a handful of recent and emerging oncology offerings look well positioned to push up the bottom line. Pfizer's breast cancer drug, Ibrance, just launched in the U.S. in 2015, and already generated a stunning $2.14 billion in sales last year.

In March, Pfizer announced FDA approval of Bavencio for the treatment of specific skin cancer patients in need of new treatment options. The drug formerly known as avelumab is the fourth that operates along the same pathways as Opdivo. Even though it wasn't the first anti-PD1 on the scene, it's the only drug of any class specifically approved for the treatment of Merkel cell carcinoma.

While Bavencio enters its first niche, investors could see plenty more in the quarters ahead. Pfizer's running at least 30 clinical studies across 15 tumor types with the drug, nine of which are late-stage trials designed to support label expanding applications. It's too early to say whether it will outperform Opdivo, but I'd be surprised if Bavencio doesn't generate more than $3 billion in annual sales at its peak.

Further ahead, Pfizer's most valuable cancer drug might still be in late-stage clinical trials. Although I think $14 billion was a bit steep for the recent acquisition of Medivation, it did come with talazoparib. Investors will want to keep their eyes peeled for late-stage clinical trial data later this year. Early results suggest it's as effective as available ovarian cancer drugs of the same class, but at a much smaller dose that causes fewer side effects.

While income investors would do well to add any one of these pharmaceutical stocks to their portfolios, I wouldn't be surprised if Pfizer's oncology lineup helps the company provide more dividend income for your hard-earned dollars than its peers.

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Cory Renauer owns shares of Johnson & Johnson. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.