Is It Time to Buy These Overlooked Dividend Stocks?

For a quick reflection of how much uncertainty is currently priced into the stock market, it just takes a glance at one key indicator. Known as the “fear gauge,” the Cboe Volatility Index ($VIX) measures how much volatility premium investors are willing to pay for short-term S&P 500 Index ($SPX) options. In the simplest terms, a low VIX is generally associated with bullish price action for stocks and relatively low volatility, while a high VIX tends to correlate with rising uncertainty and bigger, more drastic day-to-day price swings.

As markets weighed the pile-on of higher unemployment, the unwinding of the yen carry trade, and the revived probability of a recession, the VIX this week reached its highest levels since March 2020, at the onset of the COVID-19 market crash. At its peak on Monday, the VIX hit a 3-year high of 65.73 - and while it's since pulled back, the VIX still finished Wednesday's trading at historically elevated levels above 27.

With plenty of volatility still priced into the market, traditionally defensive names from the healthcare sector can be attractive investment choices. With a beta of less than 1, which indicates the stock tends to realize less volatility than the broader SPX, these healthcare picks can help add a little stability to growth-heavy portfolios.

With this in mind, here are three blue-chip dividend stocks from the Dow Jones Industrial Average ($DOWI) that have lagged in terms of share price performance this year, but have some appealing upside potential from current levels.

#1. Merck

Founded in 1891, Merck (MRK) is a global pharmaceutical and healthcare leader with a rich history spanning over a century. It is primarily engaged in the discovery, development, manufacturing, and marketing of innovative prescription medicines to address unmet medical needs. The company currently commands a mammoth market cap of $281.5 billion.

MRK stock is up 3.2% on a YTD basis, compared to 9% for the broader SPX, and 2.8% for the Dow. 

Merck's annual dividend yield of 2.77% comes in way ahead of the sector median of 1.48%. Notably, the company has been raising dividends consistently over the past 13 years, and maintains a reasonable payout ratio of about 46.4%.

In its latest quarterly results, reported in late July, Merck posted a strong set of numbers that beat expectations on both revenue and earnings. Revenues for the second quarter came in at $16.1 billion, up 7% from the previous year. The rise in sales was led by 16% yearly growth in its flagship immuno-oncology drug, Keytruda, to $7.3 billion.

Quarterly EPS of $2.28 compared favorably to a loss of $2.06 per share reported in the same period a year ago, as well as the consensus estimate of $2.17. This marked the fifth consecutive quarterly EPS beat for MRK.

For the six months ended June 30, net cash from operating activities was $8.7 billion, compared to $5 billion in the previous year. Merck also fortified its cash balance, ending the quarter with $11.3 billion in cash and equivalents, up from $6.8 billion in the year-ago period.

Over the past 10 years, Merck's revenues and EPS have compounded at 3.68% and 9.15%, respectively.

Some other key developments also bode well for Merck. Keytruda received FDA approval for use in treating endometrial cancer, following data that it can reduce the risk of worsening in the disease or death by 40-70% in some patients. Further, its hypertension treatment Winrevair has been recommended for approval by the European Medicines Agency, the EU’s evaluation body for pharmaceuticals. It will now be considered by the European Commission for marketing authorization.

In the domain of animal health, Merck recently completed the acquisition of Elanco Animal Health’s (ELAN) aqua business.

Analysts have deemed MRK stock a “Strong Buy,” with a mean target price of $140.64. This indicates an upside potential of about 25% from current levels. Out of 24 analysts covering the stock, 22 have a “Strong Buy” rating, and 2 have a “Hold” rating.

#2. UnitedHealth Group

UnitedHealth Group (UNH) is a behemoth in the healthcare industry, tracing its roots back to Charter Med, founded in 1974. The company operates primarily through two segments: UnitedHealthcare, which focuses on health benefits, including health insurance; and Optum, which offers a range of health services, including pharmacy benefits management.

Commanding a mega market cap of $523.1 billion, UNH stock is up 7.5% on a YTD basis. The stock also offers a dividend yield of 1.48%, and has been raising dividends for each of the past 14 years. With a payout ratio of just 29%, the dividends are well-covered by earnings, with room for continued growth.

The results for the latest quarter were also impressive, as UNH's Q2 revenue and earnings both surpassed estimates. The company in mid-July reported quarterly revenues of $98.9 billion, up 6.5% from the prior year, and coming in ahead of the consensus estimate by $44.2 million. EPS rose by 10.8% over the same period to $6.80, outpacing the estimate for $6.65. This marked the fifth consecutive quarterly earnings beat by the company.

For the three months ended June 30, the company's cash flow from operating activities was $6.7 billion. UNH reported a strong cash balance of $31.3 billion, up from $29.6 billion at the start of the year. 

The company's Medicare Advantage business continues to remain a growth driver. With 7.7 million Medicare Advantage (MA) plans administered in 2023, the company is a market leader with a share of about 28% in the space. In Q2, the company added 10,000 MA members. 

Further, its Optum business continued to remain in robust health, despite the passing of the Inflation Reduction Act. It clocked revenues of $62.9 billion in the quarter, up 11.7% on a YoY basis with an operating margin of 6.8%. While UNH opted to back, rather than raise, its forecast amid billions in cyberattack losses, investors seemed relieved by the outlook.

Over the past 10 years, UnitedHealth's revenue and earnings have expanded at CAGRs of 11.83% and 10.48%, respectively.

Analysts have an overall rating of “Strong Buy” for UNH stock, with a mean target price of $619.61, which indicates an upside potential of roughly 9.5% from current levels. Out of 24 analysts covering the stock, 22 have a “Strong Buy” rating, and 2 have a “Moderate Buy” rating.

#3. Johnson & Johnson

We conclude our list of Dow dividend stocks with Johnson & Johnson (JNJ). Founded in 1886, Johnson & Johnson is a global powerhouse in the healthcare industry. Operating primarily in three segments, namely, consumer health, medical devices and pharmaceuticals, JNJ is one of the most recognizable names in the industry. The company commands a sizeable market cap of $382.5 billion. 

JNJ stock is up just 1.4% on a YTD basis. However, its dividend yield of 3.12% is fairly generous. A member of the elite “Dividend King” club, the company has been raising dividends continuously over the past 61 years - and with a payout ratio of 45.9%, JNJ has plenty of flexibility to continue hiking.

The company's Q2 results, reported in mid-July, were marked by a beat on both revenue and earnings. JNJ clocked revenues of $22.4 billion in Q2, which denoted yearly growth of 4.3%. EPS went up by 10.2% over the same period to $2.82, surpassing the consensus estimate of $2.71. And just like UNH and MRK above, JNJ's latest EPS beat was also the fifth in a row.

For the first six months of 2024, JNJ generated net cash from operating activities of $9.3 billion, a growth of 25% from the prior year. In the same period, the company increased its cash balance to end June 2024 with $24.88 billion in cash, compared to $21.86 billion at the start of the year.

Encouragingly, the company's oncology division continued its strong showing in the latest quarter, with sales of $5.09 billion up 15.7% on a YoY basis. Darzalex, a medication used in the treatment of multiple myeloma, a type of blood cancer, showed a strong 18.4% YoY increase with sales of $2.88 billion. JNJ's treatment for the skin condition psoriasis and psoriatic arthritis, Tremfya, also delivered growth of 28.3% YoY growth during the quarter. 

The company is also making strides in its neurosciences business with Spravato (esketamine). It is the first NMDA receptor antagonist approved by regulatory agencies for the treatment of treatment-resistant depression, as well as depressive symptoms in certain patients with major depressive disorder. Sales for the treatment came in at $271 million in Q2, up an impressive 60.4% from the prior year.

Analysts remain cautiously optimistic about the stock, giving JNJ an overall rating of “Moderate Buy” with a mean target price of $171.26. This denotes an upside potential of about 7.8% from current levels. Out of 20 analysts covering the stock, 6 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 12 have a “Hold” rating.