The healthcare sector is demonstrating impressive relative strength. This is evident from the bullish price action in the Health Care Select Sector SPDR Fund (XLV) which moved up to all-time highs last week. 

Healthcare stocks are benefiting from lower interest rates which make their dividend payouts more attractive. Additionally, many large healthcare companies with large balance sheets are taking advantage of lower rates by increasing share buybacks. This is a tax-efficient strategy to increase earnings per share (EPS) and return capital to shareholders. Healthcare stocks are also thriving with the economy’s reopening as there is pent-up demand for a variety of medical procedures.

Therefore, investors should consider adding dividend-paying stocks in the healthcare sector to their portfolios. 3 of the top dividend-paying healthcare stocks are Johnson & Johnson (JNJ), AbbVie Inc. (ABBV), and Unitedhealth Group (UNH).   

Johnson & Johnson (JNJ)

JNJ is engaged in the research, development, production, and sale of a variety of healthcare products and services. Its three major segments are Consumer, Pharmaceutical, and Medical Devices. The company has been in the news lately with its one-shot coronavirus vaccine. 

This month, JNJ released data showing that its single-shot COVID-19 vaccine has strong, long-lasting effectiveness against the quickly spreading Delta form of SARS-CoV-2 and other SARS-CoV-2 virus variants. Furthermore, the findings revealed that the immune response was durable for at least eight months, which is the longest period that COVID-19 inoculation has been studied this far.

JNJ released earnings last week, and the company topped expectations for earnings and revenue. The report was strong across the board as the company benefited from weak comps and the economy returning to normal which resulted in pent-up demand for medical procedures. Thus, its medical devices division had a 67% increase in revenue compared to last year’s Q2. In total, the company expects its Covid-19 vaccine will generate $2.5 billion in sales this year.

Beyond its near-term results, there are some good reasons to expect that JNJ will continue to outperform. The decline in long-term rates makes companies paying dividends more attractive as JNJ yields 2.5%. Further, the company has increased its dividend every year for 59 years which puts it in an elite category. Currently, the market is facing double headwinds of slowing growth and stubborn inflation. JNJ should do well with both circumstances as its business is not dependent on economic growth, and it’s in a position to pass on rising costs to its customers.

JNJ’s POWR Ratings reflect this promising outlook. The company has an overall A rating, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its weighting. A-rated stocks have posted an average annual performance of 30.7% which is significantly better than the S&P 500’s average performance of 7.1%. 

Click here to check out our Healthcare Sector Report for 2021

AbbVie Inc. (ABBV)

ABBV develops and sells pharmaceutical products worldwide. Its products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology, dermatology, oncology, virology, metabolic diseases, pain, and other serious health conditions. 

Like JNJ, ABBV has a history of consistently raising its dividend. Over the past five years, it’s increased at an 18% annual rate. Currently, its dividend yield is 4.4% which is considerably higher than the market average and the 1.27% yield on the 10-year. Thus, I expect the stock to continue generating inflows especially as the market is currently in a risk-averse mood. 

The company is also attractive from a valuation basis as it has a forward P/E of 8.4 which is also significantly cheaper than the S&P 500’s forward P/E of 22.1. Lower valuations can provide a cushion especially when the market moves lower. 

Despite ABBV’s attractive valuation and rich dividend yield, it’s also posting impressive revenue growth as revenue was higher by 51% in the last quarter. Net income was up by 18%. It also posted guidance that was slightly higher than expectations.

ABBV’s POWR Ratings are consistent with this promising outlook. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings also evaluates stocks by various components. Given that analysts have been steadily hiking earnings estimates over the past few months for 2021 and 2022 EPS, it’s not surprising that ABBV has a B for Growth. Click here to see ABBV’s ratings for other components including Value, Industry, Quality, Stability, Sentiment, and Momentum. 

Unitedhealth Group (UNH)   

UNH has two major segments: UnitedHealthcare and Optum. UnitedHealthcare provides health care coverage and benefits services. Optum provides information and technology-enabled health services to provide employers with products and resources to plan and administer employee benefit programs.

UNH has been an outperformer over the past year and past decade for a couple of reasons. As the largest health insurance company in the US, it benefits from a strong labor market as this leads to more customers. Additionally, healthcare costs have continually trended higher at a pace faster than inflation. This has also boosted the company’s revenue, cash flow, and margins. 

Currently, analysts are projecting that UNH’s earnings will grow by 15% over the next year and compound at a 13% rate over the next 5 years. So, it’s not surprising that the stock is trading near all-time highs. Its last earnings report confirmed this momentum as revenue grew by 9% to $70.2 billion. Earnings grew by 35% to $6.7 billion. 

The stock is also intriguing from a technical perspective as it’s been consolidating between $400 and $420 over the past 3 months. Given the market environment becoming more risk-averse and its continued earnings momentum, this development bodes well for UNH breaking out higher. The consolidation also gives investors a low-risk entry point and helps the stock work off overbought conditions.

Given these positives, It’s not surprising that UNH has an overall A rating, which equates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. A-rated stocks have outperformed the market by a significant margin. UNH has an A for Stability which makes sense as it’s the largest health insurance company in the US and the improving labor market means that its customer base will only grow.

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JNJ shares were trading at $172.39 per share on Tuesday afternoon, up $0.52 (+0.30%). Year-to-date, JNJ has gained 10.91%, versus a 17.53% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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