High-yield dividend stocks can offer remarkable benefits for investors who aim to maximize their returns over the long run. However, not every high-yield stock is a good investment. Some sport high yields because their fundamentals -- and their share prices -- are weakening. Moreover, the best of them often have lofty valuations. Therefore, finding options that have a favorable combination of a reasonable price and reliability is not a simple task.
One sector that has many attractive high-yield dividend stocks is healthcare. The sector benefits from high profit margins, strong cash flows, and steady demand for its products and services. Many healthcare companies can afford to pay generous dividends to their shareholders and still invest in growth opportunities. Moreover, some of these companies are undervalued compared to their peers and offer good margins of safety.
Two examples of cheap high-yield dividend stocks in the healthcare sector are Amgen(NASDAQ: AMGN) and Bristol Myers Squibb(NYSE: BMY). Both are well-established leaders in the pharmaceutical industry with diversified portfolios of drugs and therapies. They also pay out solid dividends that are well covered by their earnings and cash flows.
Amgen: A top dividend yield and an attractive valuation
Amgen stands out as a top high-yield dividend stock for three reasons. First, its annualized payout at the current share price yields 3.65%, which is more than double the 1.56% average yield among S&P 500 listed stocks. Second, Amgen's dividend is well covered by its free cash flow. In 2022, the biotech distributed $4.2 billion in dividends to shareholders while generating a staggering $8.78 billion in free cash flow. Third, Amgen has a rich tradition of increasing its dividend. Over the past 10 years, its payouts have grown by 353% -- one of the best growth rates among large-cap pharmaceuticals.
What's the downside? Amgen is dealing with a host of headwinds such as emerging generic and biosimilar competition for its products, a relatively thin clinical pipeline, and the lack of a potent growth driver. However, its product portfolio should continue to churn out healthy levels of free cash flow, and newer product launches ought to blunt the financial impacts of its aging legacy products. The market has also seemingly baked these headwinds into the share price. After all, Amgen is currently trading at a below-average forward earnings multiple of 13.3.
Bottom line: Amgen's stock stands out as a strong buy for its generous dividend program, attractive valuation, and healthy underlying business.
Bristol Myers Squibb: A cheap, high-yield dividend play
Bristol Myers Squibb (aka BMS) is a multinational pharmaceutical company that has all the ingredients of a top-shelf dividend stock. It has raised its payouts for 14 straight years, paid dividends for 91 consecutive years, and offers a highly attractive yield of 3.52% at the current share price. Trading at under 8 times its projected earnings, BMS is also among the cheapest stocks within its big pharma peer group, as well as the varied landscape of high-yield healthcare stocks.
What's the catch? BMS stock is cheap for a reason. The company is going through a period of managerial turnover as well as a portfolio refresh. Moreover, Wall Street analysts covering the drugmaker aren't all that excited about its growth prospects from 2025 through 2030 due to multiple patent expirations. BMS management, for its part, expects newer drugs such as the heart medication Camzyos will power revenue growth in the low- to mid-single-digit percentage range over that period, which is a fairly typical rate for a company of its size and international reach.
Why is BMS a top dividend stock? With a payout ratio of 64.7%, the drugmaker can maintain its stellar and rising payouts even if it experiences some volatility in its product portfolio. BMS also has a noteworthy track record of maximizing value from its various business development transactions. Considering all that, Wall Street's take may be overly pessimistic. All told, BMS screens as a fairly safe high-yield dividend stock, despite its limited growth prospects.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.