7 Best Health Care Sector Dividend Stocks

These dividend growth stocks are my top-ranked Health Care sector picks. Three stocks are discounted and two more trade at small premiums to my fair value estimates.
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One way to diversify your portfolio is to invest in different sectors. Some sectors perform better than others in different economic conditions, and sector diversification helps to mitigate portfolio risk.

In this article series, I present the top-ranked dividend growth stocks in each GICS sector. To rank stocks, I sort them in descending order by quality scores, as determined by DVK Quality Snapshots. When two stocks have the same quality score, I use tie-breaking metrics to rank one stock higher than the other.

My watch list for candidates is Dividend Radar, a list of stocks trading on U.S. Exchanges with at least five consecutive years of higher dividend payouts. The list is updated and published every Friday and is available for download here. The latest edition (dated August 6, 2021) contains 759 stocks, 37 of which are in the Health Care sector.

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Here are the previous articles in this series, in case you missed them:

The Health Care Sector

The Health Care sector incorporates two industry groups, Health Care Equipment & Services and Pharmaceuticals, Biotechnology, & Life Sciences. The first contains businesses that manufacture health care equipment and supplies or provide various health care services, including distributors of health care products, providers of essential health care services, and owners and operators of health care facilities and organizations. The second contains businesses involved in the research, development, manufacturing, and marketing of pharmaceuticals and biotechnology products.

A detailed breakdown of the Health Care sector (source: Dividend.com)

A detailed breakdown of the Health Care sector (source: Dividend.com)

Sector and Performance Comparison

Let’s compare the sector averages and historical performance of the GICS sectors over different periods to see how the Health Care sector compares:

Sector averages of Dividend Radar stocks and the historical performance of sectors (data sources: Dividend Radar 16 July • Fidelity Research and Google Finance 21 July)

Sector averages of Dividend Radar stocks and the historical performance of sectors (data sources: Dividend Radar 16 July • Fidelity Research and Google Finance 21 July)

The table is color-coded to show each column’s highest (green) and lowest (red) values.

Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:

Sector performance charts (created by the author with data from Fidelity Research, 10 August 2021)

Sector performance charts (created by the author with data from Fidelity Research, 10 August 2021)

The Health Care sector outperformed the S&P 500 over the past 1-month and 3-month periods, but underperformed the S&P 500 over the 1-year and 5-year time frames.

Quality Assessment

I use DVK Quality Snapshots to assess the quality of dividend growth stocks. Developed by David Van Knapp, the system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points.

I’ve developed my own ranking system, which sorts stocks by descending quality scores and breaks ties by using the following factors, in turn:

  • SSD Dividend Safety Scores
  • S&P Credit Ratings
  • Dividend Yield

I rate stocks by quality score as Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range of 15-25, while Speculative Grade ratings have quality scores below 15.

Top-Ranked Health Care Sector Stocks

Here are the seven top-ranked dividend growth stocks in the Health Care Sector:

Screen Shot 2021-08-16 at 1.15.09 PM

Note that I’m long the highlighted tickers in my DivGro portfolio.

1. Johnson & Johnson (JNJ)

Founded in 1886 and based in New Brunswick, New Jersey, JNJ has grown into one of the largest companies in the world. The company is a leader in the pharmaceutical, medical device, and consumer products industries. JNJ distributes its products to the general public, retail outlets and distributors, wholesalers, hospitals, and health care professionals.

2. Merck & Co., Inc. (MRK)

Founded in 1891 and headquartered in Kenilworth, New Jersey, MRK is a global health care company that offers health solutions through prescription medicines, vaccines, biologic therapies, and animal health products. MRK markets its products to drug wholesalers and retailers, hospitals, government entities and agencies, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers.

3. Medtronic plc (MDT)

MDT manufactures and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. The company operates in four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group. MDT was founded in 1949 and is headquartered in Dublin, Ireland.

4. Eli Lilly and Company (LLY)

LLY discovers, develops, manufactures, and markets pharmaceutical products worldwide. The company offers endocrinology products for the treatment of diabetes; osteoporosis in postmenopausal women and men; and human growth hormone deficiency and pediatric growth conditions. The company also provides neuroscience, immunology, oncology, and cardiovascular products. LLY was founded in 1876 and is headquartered in Indianapolis, Indiana.

5. Stryker Corporation (SYK)

Founded in 1941 and headquartered in Kalamazoo, Michigan, SYK operates as a medical technology company. The company operates through three segments: Orthopaedics, MedSurg, and Neurotechnology and Spine. SYK sells its products to doctors, hospitals, and other healthcare facilities through company-owned subsidiaries and branches, as well as third-party dealers and distributors in approximately 75 countries.

6. UnitedHealth Group Incorporated (UNH)

Founded in 1974 and based in Minnetonka, Minnesota, UNH is a diversified health and well-being company with core capabilities in clinical expertise, advanced technology, and data and health information. The company provides medical benefits to customers in the United States and in more than 125 other countries.

7. Bristol-Myers Squibb Company (BMY)

BMY discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. The company's pharmaceutical products include chemically synthesized drugs administered as tablets or capsules. It also uses biologics to produce products administered through injections or by infusion. BMY was founded in 1887 and is headquartered in New York, New York.

Please note that these stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak (Years), the dividend Yield for a recent share Price, and the 5-year compound annual dividend growth rate (5-Yr DGR). The Chowder Number (CDN) and 5-year Yield on Cost (5-Yr YoC) are measures of a stock’s future total return and dividend income prospects, while the 5-year trailing total returns (5-Yr TTR) is a measure of the stock’s performance over the past five years.

I also provide the five quality indicators used in determining each stock's quality score (Qual), as well as my Fair Value estimate to help identify stocks that trade at favorable valuations. The discount/premium column (-Disc/+Prem) shows the discount or premium of a recent share price to my fair value estimates.

Screen Shot 2021-08-16 at 1.18.33 PM
Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using each stock’s 5-year average dividend yield using data from Portfolio Insight. Finally, with several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Commentary

The top-ranked Health Care sector stock, JNJ, is rated Exceptional (quality score 25) and is one of only two stocks with a AAA credit rating. JNJ is a member of an elite group of stocks that are Dividend Kings, Dividend Aristocrats, and Dividend Champions. The stock is trading at about fair value.

The remaining stocks are rated Excellent (quality scores 23-24). BMY and MRK are discounted most, while MDT and UNH are trading at small premiums to my fair value estimates.

I own six of the seven top-ranked Health Care sector stocks, the exception being LLY. Unfortunately, LLY is overvalued and trading at a premium of about 17% to my fair value estimate.

Of the discounted stocks, I think MRK presents the best value at the moment. Discounted by 16% to my fair value estimate of $89, MRK offers the highest yield and a solid 5-year DGR of 6.9%. The stock’s 5-year yield on cost is 4.8%, the highest of the seven candidates.

For investors looking for total returns rather than dividend income, SYK and UNH have the highest 5-year DGRs and could perform well in the future should the companies continue their generous dividend increases. The pair outperformed the remaining candidates over the past 20 years:

Comparison of the total returns of the top-ranked Health Care sector stocks over the past 20 years (source: Portfolio-Insight.com)

Comparison of the total returns of the top-ranked Health Care sector stocks over the past 20 years (source: Portfolio-Insight.com)

UNH is the best performer, by far, with total returns of 2,956% or an impressive 18.65% on an annualized basis! UNH is trading at a small premium of 5%, so investors may want to wait for a better entry point before buying shares.

If we compare total returns over the past five years, LLY tops UNH and SYK and appears to have the strongest momentum. If fact, I recently identified LLY as one of the highest-quality dividend growth stocks with accelerating total returns. Note that all three stocks has performed the S&P 500 (as represented by the SPDR S&P 500 Trust ETF, SPY):

Comparison of the total returns of LLY, UNH, SYK, and SPY over the past 5 years (source: Portfolio-Insight.com)

Comparison of the total returns of LLY, UNH, SYK, and SPY over the past 5 years (source: Portfolio-Insight.com)

I would wait for a pullback before investing in LLY, as the stock is significantly overvalued at current price levels.

Concluding Remarks

This article presented the seven top-ranked dividend growth stocks in the Health Care sector.

MRK and UNH appear to present the best opportunities for investors looking for strong dividend income and total returns, respectively. MRK is discounted, but investors may want to wait for a better entry point before buying UNH.

Three of the seven stocks are discounted and two trade at small premiums. LLY is overvalued, following strong price performance in recent years. I would wait for a better entry point, though, somewhere below $213 per share.

Thanks for reading!

Next time, we’ll look at the best Industrials sector stocks.

Thanks for reading!

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I’d be happy to answer any questions you may have!

Note: Interested in getting periodic e-mail notifications when articles are published here? Drop your e-mail in the box below!

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