Since the beginning of the 20th century, dividend stocks have accounted for 75% of the total returns in the U.S. stock market. Dividend growth stocks, which are companies that regularly increase their cash payouts to shareholders annually, have significantly outperformed the majority of other asset classes over this 124-year span.
The primary reason for this is the power of compounding. By owning a dividend growth stock and reinvesting the dividends each quarter, your investment can experience exponential growth without any additional effort from you.
The healthcare sector is a hub for numerous leading dividend growth stocks. Many of these companies provide essential goods and services that are less affected by economic cycles. In addition, most healthcare firms have substantial profit margins, leading to healthy levels of free cash flow every quarter. While most of these companies don't offer extremely high yields, they typically increase the size of their dividend payouts annually.
Image source: Getty Images.
So, which dividend growth stocks in the healthcare sector stand out? Biotechnology giants AbbVie (NYSE: ABBV) and Amgen(NASDAQ: AMGN) have both generously rewarded their long-term shareholders with a rapid dividend growth rate, a substantial yield, and consistent capital appreciation. Let's examine which of these top dividend growth stocks is the better investment at the moment.
The argument for AbbVie
AbbVie is a dominant force in the field of immunology. Since its separation from Abbott Laboratories over a decade ago, the company has been a leading vehicle for capital appreciation, largely due to the robust commercial performance of its anti-inflammatory drug, Humira.
Despite Humira's commercial momentum slowing down due to the emergence of biosimilars, AbbVie expects newer immunology drugs like Skyrizi and Rinvoq to eventually offset losses from this key patent expiry. Additionally, AbbVie boasts a growing pipeline and product portfolio in the areas of cancer, neuroscience, and medical aesthetics.
In terms of dividend growth, AbbVie has increased its annual cash distributions to shareholders by an average of 7.69% over the past five years. Currently, the pharmaceutical company's shares offer an annualized yield of 3.46%, more than twice the average yield of equities listed on the S&P 500.
However, it's worth noting that AbbVie's debt-to-equity ratio, a measure of the company's financial leverage, currently stands at 582%. Its trailing 12-month payout ratio of 217% also raises concerns, particularly given the sharp drop in its top-line growth.
The argument for Amgen
Amgen is a trailblazer in the biotech industry. The company boasts an innovative array of drugs and drug candidates that cover areas from cardiology care to immunology and cancer. While Amgen is currently undergoing a portfolio transition due to its wide range of aging former star products, newer medications like the cholesterol-lowering drug Repatha have stepped in to fill the gap in recent quarters. The company's recent acquisition of Horizon Therapeutics, a specialist in rare diseases, is expected to further enhance its growth trajectory in the coming years.
In terms of dividends, Amgen offers a robust annualized yield of 3.23% and a scorching five-year dividend growth rate of 9.1%. It also maintains a comfortable trailing 12-month payout ratio of around 68%, indicating that its dividend is well supported by earnings.
However, Amgen does face a leverage issue, as evidenced by its substantial 1,049% debt-to-equity ratio. The silver lining is that analysts predict the biotech will achieve top-line growth exceeding 20% over the next two years. Consequently, Amgen should possess the financial strength needed to rapidly reduce leverage, although it may not be in a position to readily undertake additional bolt-on acquisitions in the near future.
Verdict
In this comparison, Amgen appears to be the more attractive dividend growth stock. While both stocks could potentially be valuable long-term investments, Amgen's dividend scans as safer due to its relatively average payout ratio for a biopharmaceutical company. The company has also been increasing the size of its dividend checks at a faster rate over the past five years.
Although AbbVie is likely to continue increasing its dividend in the coming years for reasons not covered in this article, Amgen comes across as the safer of the two based on the all-important payout ratio metric. Safety is paramount when investing in dividend growth stocks, as maintaining momentum is crucial once the investment snowball starts rolling.
Should you invest $1,000 in AbbVie right now?
Before you buy stock in AbbVie, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and AbbVie wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of February 26, 2024
George Budwell has no position in any of the stocks mentioned. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.
