Roundtable: Best Dividends in Health Care

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Right now, dividend stocks couldn't be more popular. With bond market yields low, investors have turned to equities to get the steady stream of income they desire. However, just sticking your money in a handful of stocks with high dividends isn't a sound investing strategy. With that in mind, we've gathered four Fools to impart their expertise and name their favorite dividend payers from the health-care industry.

Fool contributor Brian Orelli: Bristol-Myers Squibb (NYS: BMY) will lose top-selling Plavix to generic competition in 2012, causing earnings to drop substantially. But in the long-term battle of pipeline versus patent cliff, it sure looks like the pipeline will come out the winner.

The company expects 2013 earnings to drop to as little as $1.95 per share, a level just below what it managed last year. But that guidance was from before a couple of stellar wins: approval of melanoma drug Yervoy and positive clinical trial results for cardiovascular drug Eliquis, which it'll market with Pfizer (NYS: PFE) . Behind those, the pipeline looks pretty solid, and Bristol-Myers has $6.8 billion that it can use to in-license drugs to help replace the missing Plavix revenue.

Capital appreciation might be minimal over the next few years; it's trading at 15 times the aforementioned 2013 earnings guidance. But with a substantial 4.6% dividend yield, investors can afford to collect the income and wait for better times.

Fool contributor Dan Caplinger: When it comes to health-care stocks, many investors gravitate toward big pharma names. Yet while their dividend yields are in many cases remarkably high, you have to take on a huge amount of pipeline risk to earn them.

That's why I like Stryker (NYS: SYK) , a medical-device giant with its claws firmly latched into two promising niche markets: orthopedic implants and surgical equipment units. In its hip and knee replacement business, Stryker faces competition from higher-yielding companies like Medtronic (NYS: MDT) , but Stryker gives investors a couple of things its competitors can't: an amazing dividend growth rate of 43% annually over the past five years, and insider ownership of roughly 20% by various Stryker family members.

With a yield of just 1.2%, Stryker may not seem like a strong choice for a top dividend stock. Over time, though, investors can expect to see that yield rise substantially, especially as a tough environment for capital spending on medical equipment gives way to a faster economic recovery.

David Williamson: I agree with Brian and Dan. I love the Bristol-Myers selection, and Dan's approach of looking for the next great dividend payer is a smart. So here are two quick picks that fit their mold.

Johnson & Johnson (NYS: JNJ) is more of a diversified medical behemoth than purely a member of Big Pharma, even though it is included in that group. Sure, it's not a sexy pick, but it is a stalwart that has increased its dividend for 49 straight years, averaging 10% growth over the past five. Its payout ratio is under 50%, and its sterling AAA credit rating ensures that J&J's streak won't be ending anytime soon. A series of recalls have damaged the company, but its global presence, along with its diversified segments, will keep investors safe from large-scale disruption.

The other name I have is Owens & Minor (NYS: OMI) . Its yield may not be impressive yet at 2.3%, but Owens & Minor only started paying a dividend in 2007, growing it at a 56% clip over the past three years. The health-care distributor has just under $15 million in net debt, consistently produces more free cash flow than net income, has a payout ratio of just 42%, and, although not cheap, doesn't appear overvalued compared with its peers.

Fool contributor Rich Smith: When I was asked to suggest a great dividend idea in health care, a light bulb lit above my head. And the company responsible for it was General Electric (NYS: GE) .

Now, GE is a great big conglomerate of a company. It invented the light bulb. It helped commercialize home appliances, and it is currently leading the way in powering electric cars. But GE is also one of the biggest names in health care, building equipment for everything from X-rays and mammograms to entire health-care IT systems.

GE's also historically been a generous dividend payer and could become so once again. The company's CEO recently promised that GE will reward shareholders with a "very good dividend." Its payout ratio sits at 39%, well below the 53% average of the previous 10 years. By my back-of-the-envelope calculations using GE's estimates, that could translate into as much as a 4.7% dividend yield on today's stock price.

If I'm right, investors who buy GE today will see annual dividend payouts increase by perhaps 50% within 18 months. If I'm wrong, these investors still get to buy one of the premier names in American industry for just 15 times earnings. With these earnings expected to grow at a 14% clip, even today's steady-Eddie 3.2% dividend doesn't seem so bad.

David Williamson: Well there you have it, Fools. You've heard from our experts, but now we want to hear from you. Sound off in the comments section below and let us know why we're either brilliant or idiots. And be sure to add Bristol-Myers, Stryker, Johnson & Johnson, Owens & Minor, and General Electric to Your Watchlist and never miss out on our latest coverage.

At the time this article was published David Williamson owns shares of Pfizer, General Electric, and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Medtronic. Motley Fool newsletter services have recommended buying shares of Pfizer, Johnson & Johnson, and Stryker and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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