Dividend growth investing is an excellent strategy for any long-term investor. It involves buying and holding companies that pay and raise their dividends year after year. Investors benefit from dividends; you can reinvest them to buy more shares or pay living expenses. Additionally, companies must grow and responsibly manage their money to afford an ever-increasing obligation like a growing dividend. It's a back-door litmus test for high-quality stocks.
This month, three stellar dividend growth stocks caught my eye in the healthcare sector. Take a look at what makes them so special and why they are table-pounding buys this month.
1. Abbott Labs
Grace Groner is one of my favorite investing stories. In 1935, she bought three shares of Abbott Laboratories(NYSE: ABT) as an employee. After living an ordinary life, she eventually died a multimillionaire from all the dividends and gains her investment accumulated throughout her lifetime. Nearly a century later, Abbott Labs remains a stalwart in healthcare. The company sells consumer health products, testing equipment, medical devices, and branded generic pharmaceuticals. Abbott is a global company with over $40 billion in annual sales.
Abbott is also a legendary dividend stock. The company has paid and raised its dividend for 52 consecutive years, a rare feat that places Abbott among the Dividend Kings. The business has endured recessions, wars, and the ups and downs of being around for so long while evolving to create the constant growth needed to pay a rising dividend. It's a testament to Abbott's leadership and corporate culture. Today, Abbott's stock offers a starting yield of almost 2%. The payout is only about half of Abbott's earnings, so shareholders should expect that dividend to continue growing for the foreseeable future.
The stock trades at 24 times earnings, and analysts expect those earnings to compound between 8% and 9% annually over the long term. That doesn't seem cheap if you look at growth alone. However, Abbott's long track record of success and strong fundamentals arguably justify a premium. The stock is actually well below its average price-to-earnings (P/E) ratio of 37 over the past five years. Investors can nibble on the stock today while keeping some money set aside for a better buying opportunity if one arises.
2. Johnson & Johnson
You can't discuss the healthcare industry without including Johnson & Johnson(NYSE: JNJ). This behemoth features two business units: its pharmaceutical segment, Innovative Medicine, and MedTech, which sells medical devices and products ranging from orthopedics to contact lenses. The company once had a consumer products division but spun it off as Kenvue last summer to focus on growing its core businesses. Johnson & Johnson sells its products worldwide, generating over $86 billion in annual sales.
Johnson & Johnson is arguably the world's most famous healthcare dividend stock. Investors gravitate to Johnson & Johnson for its durability and dividends. Not only is it a Dividend King, but its ongoing 62-year dividend growth streak is one of the longest of any public company on record. The company boasts a AAA credit rating, higher than the U.S. government, and is one of just two public companies with the designation.
In recent years, concerns over liabilities related to talcum powder litigation, which could cost billions of dollars, have weighed on the company. It's a risk, but one Johnson & Johnson seems prepared for with over $11 billion set aside for settlements. Meanwhile, the stock trades at just 16 times earnings today and offers a starting dividend yield of 3%. The litigation liability could deter some, but shares could get a boost once the lawsuits settle.
3. Pfizer
Pharmaceutical giant Pfizer(NYSE: PFE) dates back to the mid-1800s and has evolved from producing penicillin in the 1940s to the COVID-19 vaccine in 2020. Pfizer's current product portfolio includes standouts like blood thinner Eliquis and vaccine product Prevnar. Oncology will drive Pfizer's long-term growth; the company acquired Seagen for $43 billion last year. Pfizer doesn't have the dividend-growth streak of these other companies, but management has raised the payout for 14 consecutive years.
COVID-19 sales created a temporary tidal wave of growth for Pfizer, but investors fled the stock once sales and earnings normalized. It looks like the selling has gone too far. Pfizer trades under 12 times earnings despite analysts expecting nearly 11% annualized earnings growth over the next three to five years. It's generally a great buying opportunity when a stock's P/E ratio and growth rate are the same.
And it gets better! Pfizer stock's starting dividend yield is currently 5.5%, higher than Abbott Labs and Johnson & Johnson. The dividend equates to roughly 65% of Pfizer's estimated 2024 earnings, so management shouldn't have a problem making that payment. So, those looking for generous passive income from Day 1 should look closely at Pfizer.
Should you invest $1,000 in Abbott Laboratories right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories, Kenvue, and Pfizer. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2026 $13 calls on Kenvue. The Motley Fool has a disclosure policy.
