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Healthcare's stable revenue and growing demand due to aging baby boomers makes it a hit with income investors, but not every healthcare stock with a big dividend yield is ripe to buy. These 10 healthcare stocks offer the best dividend yields in the sector, yet investors should avoid most of them.
The 10best dividend yields in healthcare
We'll get into the nitty-gritty of which of these stocks are buys and sells in a minute, but first let's take a look at the list of the top 10 highest-dividend-yielding healthcare stocks:
Data source: Fidelity.com's stock screener.
High-yield stocks to buy
Out of the above stocks, only two jump out at me as names to stash away in income portfolios right now: Pfizer, Inc. (NYSE: PFE)and Roche Holdings (NASDAQOTH: RHHBY).
While Pfizer's sales have been falling since patents expired on its$13 billion per-year cholesterol drug in 2011, the corner appears to be turning for the company. Pfizer has reported six consecutive quarters of organic growth, and cost-cutting moves in the post-Lipitor era appear to be providing margin-friendly leverage. New drugs, including the cancer drug Ibrance and the anticoagulant Eliquis, offer upside, as does the opportunity to dominate the market for biosimilars thanks to its $17 billion acquisition of Hospira last year. If Pfizer's growth accelerates, it could lead to handsome dividend hikes.
Roche Holdings isn't going to deliver barn-burner growth, but management expects the company's sales will grow in the mid to high single digits this year on the back of its cancer drugs and diagnostic products. Roche's cancer drugs include some of the world's top sellers, such as Herceptin, and diagnostics revenue is being supported by a flurry of research into immunology.
Admittedly, biosimilars could whittle away at some of the company's cancer drug market share over time, but Roche's R&D programs are enjoying a lot of success recently and that's got me optimistic. This year, the FDA approved Venclexta for a specific form of leukemia, and the immunotherapy drug, Tecentriq, for bladder cancer. Additionally, the FDA is expected to issue a decision on Ocrevus for both relapsing and progressive multiple sclerosis on Dec. 28. If approved, that drug has dividend-friendly multibillion-dollar potential.
High-yield stocks to avoid
Unfortunately, the remaining stocks on this high dividend yield list are arguably too risky for most income investors.
For example,Computer Programs and Systems(NASDAQ: CPSI)offers the highest dividend yield, but CPSI is a tiny fish in a very big and competitive pond. CPSI targets small to midsize hospitals, and that market is budget strained and consolidating, which makes it tough for CPSI to grow its sales and profit. Last quarter, earnings per share fell 66% from last year.
To kick-start sales, CPSI recently bought Healthland for $250 million. However, that deal has left the company's balance sheet lacking. Exiting Q2, the company has $16 million in short- and long-term cash and investments on the books, compared to $145 million in short- and long-term debt. I don't know about you, but that's not the kind of balance sheet I want to own in my dividend portfolio.
Patent expiration makes the remaining drugmakers on this list too risky, too.
AbbVie Inc. (NYSE: ABBV) loses patent protection on Humira -- the world's best-selling drug -- at the end of 2016, and while management believes method-of-use patents could fend off biosimilars for a few more years, that's not a given.
If Humira biosimilars launch sooner than management thinks, then over 60% of the company's revenue could be in jeopardy. AbbVie is attempting to sidestep the threat by expanding into cancer treatment. However, Humira's uncertainty makes this unfit for anyone who isn't risk-tolerant.
Similarly, patent expiration on key drugs at GlaxoSmithKline, AstraZeneca, Sanofi, and Novartismakes their dividend appear less enticing. These companies could lose billions of dollars in sales to generic competitors from the loss of patent protection on the multibillion-dollar top sellers Advair, Crestor, Lantus, and Gleevac, respectively.
The remaining high-yield stocks on this list -- Kindred Healthcare, Meridian Biosciences,and Owens & Minor -- aren't very alluring either.
Kindred's long-term care facilities serve a growing market, but it's continuously battling with government payers over reimbursement. Meanwhile, Meridian Biosciences and Owens & Minor are low- to mid-single-digit growth stocks with forward price-to-earnings ratios that I think already value them fairly.
Tying it together
It's tempting to focus on yield when evaluating dividend stocks, but high dividend yields can often indicate companies with struggling businesses or risks that could derail them. Rather than chasing yield, a better approach is to buyquality companies that have catalysts for revenue and earnings growth. Using that criterion, Pfizer and Roche Holdings appear to me to be the only high-dividend-yielding companies in healthcare worth buying today.
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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him onTwitter, where he goes by the handle@ebcapital, to see more articles like this.The Motley Fool has no position in any of the stocks mentioned. 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.