) -- Too often, there's a battle between income investors and investors chasing capital gains. Would you rather take a reliable income check on your portfolio, or would you prefer share price appreciation? That question may drive some great debates in an MBA class, but it's a whole lot less relevant to the real world.
I'm happy to report that it's not an either/or. You can have both.
In fact, dividend payouts and capital gains are more complementary than anything else. The data bears that out too. Over the last three and a half decades, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, based on data compiled by Ned Davis Research.
But instead of looking for industries with high yields, it makes sense to approach the problem the other way around: by seeking out industries with high stock performance and then backing into individual high-yield names. By focusing on sectors with
first, you skirt the typical catastrophes that come from chasing yield.
So that's why we're looking at health care stocks. Health care is on a tear in 2013. While the
has churned out some impressive gains year-to-date, big health indices are up more than 38% over the same time period. That's more than 10% outperformance. And short-term, health care stocks have been widening the gap even further.
So as the year draws to a close, here's a look at
offering up a mix of income and capital gains right now.
2013 has been a stellar year for
), the $67 billion pharma firm that spun off from
) a year ago. AbbVie is up more than 46% since the calendar flipped over to January, stomping the broad market over that time period. The firm's dividend payout is no slouch, either. Currently ABBV pays a 3.2% yield.
AbbVie owns Abbott's legacy pharmaceutical business, warts and all. That means that the firm owns blockbuster drugs such as Humira and a pipeline of attractive new drugs and uses. The downside, though, is that Humira makes up nearly half of ABBV's profits, adding a lot of concentration risk to the income statement that dries up when patent protection ends in 2016. While new indications for Humira should help to keep revenues afloat beyond that deadline, we'll want to see the firm diversify its P&L with new drugs in the years to come.
In the meantime, AbbVie is going to be raking in the cash with a well-defended high-margin pharmaceutical product. Beyond investing in its pipeline through R&D and acquisitions, the firm pays out a hefty dividend that's wholly supported by cash flows.
With a relatively cheap valuation compared to the rest of the pharma sector, ABBV is one of the best-positioned drugmakers right now.
Select Medical Holdings
If yield is what you're after, then hospital and rehab center operator
Select Medical Holdings
) fits the bill. The small-cap health care name currently dishes out a 4.69% dividend yield at current price levels. And while the risks are certainly higher in a smaller name such as Select, the
are pointing toward a turnaround in this dividend name.
Select Medical owns 110 acute-care hospitals and 12 inpatient rehab centers, with another 979 outpatient rehab centers. SEM benefits from major tailwinds in demographic shifts and regulatory changes. As the population ages, the need for Select's bread-and-butter acute long-term hospitals should continue to grow, enabling the firm to boost its footprint organically. Rehabilitation is another important business in transition, as more care moves from being an out-of-pocket expense for patients to a covered treatment under new health laws.
Today, Select earns about half of its revenues from the Federal government. If increased private insurance can fill some of the gap, it'll take additional risks off of Select's plate. Even though SEM has conspicuously underwhelmed Wall Street in the last few quarters, the data indicate that investor sentiment is finally turning over. Don't expect that hefty dividend yield and a single-digit P/E ratio to last forever.
You can't deduct them as dependents with the IRS, but there's no question that the vast majority of Americans look at their pets as full-fledged members of the family. That's evident by how much we spend on them. In recent years, pet spending has reached all-time highs as owners fork over big bucks to feed Fido the best food and set him up with the best accessories. That trend is translating to an exciting opportunity for
PetMed Express is a pet pharmacy that sells prescription and non-prescription medicine and pet supplies direct to consumers. That makes PETS a unique name in the healthcare sector, but the stock's performance this year speaks for itself: shares have climbed close to 37% since January. While there's ample competition in the pet retail space, this stock's niche in selling low-priced authentic pet medication has built a recognized brand.
From a financial standpoint, PetMed is in stellar shape, with a sixth of the firm's market capitalization paid for in cash with no debt. The relatively high margins PETS earns on pet pharmaceuticals mean that more dollars get converted into shareholder cash each quarter than a conventional human retail pharmacy earns. And that, in turn, finances a hefty 4.48% dividend yield in shares right now. PETS may be an unconventional healthcare name, but it's proving to be a lucrative one.
Medical product maker
) is a more predictable health care name. Baxter is a leader in the injectable therapies market, manufacturing everything from IV bags and solutions to dialysis equipment. The acquisition of Gambro in September greatly increased the firm's exposure to the dialysis treatment business, a niche that offers some of the biggest growth opportunities for BAX in the years ahead.
With the exception of dialysis, Baxter's business is built around niche treatments. By focusing on smaller markets for its medical offerings, the firm is able to secure the market-leading position in the field and command heftier margins for its specialized efforts. The medical products segment is less glamorous, providing must-have medical supplies to hospitals and pharmacies, but it still contributes around half of Baxter's sales. By retaining the more boring side of its business, it's been able to finance the higher-growth BioScience division.
Sales growth has been slow over the last several years, but it's been steady and positive. And so have profit margins. That cash generation supports a 2.91% dividend yield right now, making Baxter a solid middle-of-the-road option for income-seekers right now. You could do a lot worse than the price tag that's currently on shares of this stock.
Last up is mid-cap health care firm
). HealthSouth weighs in as the country's largest owner and operator of inpatient rehab hospitals, but on Wall Street it's probably best known for the accounting scandals a decade ago that caught headlines a decade ago. This isn't the same HealthSouth.
The growth catalysts in HealthSouth look a lot like the ones in Select Medical: demographic shifts and government regulations are simultaneously upping demand for rehabilitative care and increasing HLS' ability to collect payment for those services. In a lot of ways, the black clouds that followed HealthSouth after its scandals broke have kept management more conservative than many peers in the years that followed -- a strong balance sheet with healthy leverage and excellent income statement growth are two results of that.
HealthSouth consistently earns net profit margins in the double-digits. That means that the firm is able to drag more of each revenue dollar down to the bottom line than many of its smaller peers are. Even though HLS' 2.04% dividend payout hardly qualifies as high-yield, it's a big enough payout to generate meaningful income in this zero-rate environment.
To see these plays in action, check out the at
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in
Investor's Business Daily
, and on
Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji