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Top 10 Healthcare Stocks For Dividend Growth And Income

Summary

With the stock market in correction mode, investment opportunities for long term investors are becoming more attractive.

The health care sector has participated in the correction, and now presents some nice opportunities for growth and income at a reasonable price.

This article presents a watch list of 20 of the best health care companies, from which I present the top 10 stocks for dividend growth and income at today's prices.

Overview

This article is the fifth in a series presenting a sector by sector look at some of the top dividend growth opportunities in the stock market. For easy reference, here are the previous sectors that have been covered:

The health care sector is well known for being one of the best sectors in the market for growth, but it can also provide attractive opportunities for income as well.

While its members generally don't have the high initial yields seen in the previously covered sectors, higher dividend growth rates can still produce impressive yield on cost numbers that can be a great start to filling your piggy bank for retirement.

In addition to income, the health care sector has also been a top performer in total returns, as seen in this table from Morningstar:

While this sector has long been a top performer, there seems to be concern of the potential for disruption in the sector due to legislative changes in the Federal Government, as seen by the market over-reaction to presidential hopeful Hillary Clinton's recent

:

Fears of the future aside, the current operation environment is providing a great tailwind for the sector. The Affordable Care Act a.k.a "Obamacare" is providing expanded coverage to millions of previously uncovered Americans, which creates additional demand for products and services. Additionally, 10,000 members of the Baby Boomer generation are reaching the retirement age of 65 daily, which logically leads to expanding medical requirements as they grow older.

Tailwinds aside, the sector has struggled of late, as seen by the performance of the Health Care Select Sector SPDR ETF (NYSEARCA:XLV), which is still nearly 12% below recent highs.

XLV Chart

With the sector as a whole trading firmly in correction territory, there are plenty of companies trading at or below fair value.

We will take a more detailed look at valuations further below, but first let's look at the companies that made the initial watch list. This list was sourced primarily from David Fish's U.S. Dividend Champions List, which is a spreadsheet he updates monthly to provide information on companies that have grown their dividends for the last 5+, 10+, and 20+ years. From this list, there were 32 companies in the health care field to consider. Additionally, I looked through my own watch lists and added companies that have recently started paying a dividend that I feel will continue doing so into the future.

For a quality screening, I used a minimum S&P credit rating of BBB and I also used F.A.S.T. Graphs to look at company performance histories to identify those who have shown a track record of consistent growth. I also omitted any stocks with a dividend yield under 1%, as they don't fit with the premise of this article.

Here are the twenty finalists for consideration, along with some general information and their current prices in relation to 52-week highs.

TickerCompanySub Sector# Years Div. Inc.S&P Credit RatingDebt / CapBetaMarket Cap (B$)52-Week High52-Week LowShare Price 9/03/15% Below 52-Wk High
(NYSE:ABC)AmerisourceBergen Corp.Drug Distribution10A-70%0.81$20.4$120.68$74.32$94.90-21.36%
(NYSE:BDX)Becton, Dickinson & Co.Medical Instruments43BBB+55%1.00$27.8$154.98$114.61$135.37-12.65%
(NYSE:BMY)Bristol-Meyers SquibbDrugs5A+29%0.40$100.1$70.54$47.54$62.20-11.82%
(NYSE:CAH)Cardinal Health Inc.Drugs19A-44%0.59$25.4$91.91$71.72$78.61-14.47%
(NYSE:DGX)Quest DiagnosticsHealth Care Services4BBB+44%0.61$8.8$89.00$56.27$62.81-29.43%
(NASDAQ:GILD)Gilead Sciences Inc.Biotechnologyn/aA-41%0.85$144.2$123.37$85.95$98.28-20.34%
(NYSE:JNJ)Johnson & JohnsonDrugs/Consumer Prod.53AAA15%0.60$258.0$109.49$81.79$93.92-14.22%
(NYSE:STJ)St. Jude Medical Inc.Medical Equipment5A23%1.40$17.7$80.84$54.80$63.81-21.07%

As previously noted, share prices in the sector have been hit hard, with half of the companies on the list more than 15% below 52-week highs. Quest Diagnostics has seen the biggest fall with a nearly 30% dip, while UnitedHealth Group has been relatively unscathed, with a less than 6% drop.

Historical And Current Numbers

First up is a look at the historical dividend growth rates for the companies, as well as a look at the expected 2015 earnings and corresponding P/E and payout ratios for them. The data in the following tables was collected from various sources, including the aforementioned Dividend Champions List, Yahoo Finance, Seeking Alpha, F.A.S.T. Graphs, and investor relations web pages from the selected companies.

For the earnings estimates and "Fair Value" P/E columns, I put each of the companies through F.A.S.T. Graphs and also went to the analyst estimates page on Yahoo Finance. The estimated 2015 earnings came from a blend of the numbers from the two sources. The "Fair Value" number was determined by looking at several different time frames on F.A.S.T. Graphs to determine what kind of valuations each company normally trades at. A comparison was then made between the expected P/E based on 2015 analyst estimates and the "Fair Value" P/E to get a feel for the relative values for the different options.

You can see there is a wide spectrum of results among the companies. The current yields vary from 1.22% to 3.66%, P/E ratios from 8.4 to 33.8, and payout ratios from 14.8% to 80.4%.

This wide variety of opportunities can raise tough questions on where to put investment dollars. Should you stick with the high yielding companies to lock in a higher current income or go with a more mid-range yield from a company that is growing faster? The next section will look to answer that question.

Now that we've analyzed the historical and...


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