Buy These 5 Healthy Blue Chips with Growing Dividends

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After a big snap-back rally for the S&P 500 at the end of October, we are once again sitting on a nice year-to-date gain for stock investors. However, one sector that never really faced as much trouble and is sitting on even bigger profits in 2014 is healthcare stocks.

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Take the iShares Dow Jones US Healthcare ETF (IYH) or the Health Care Select Sector SPDR (XLV), both of which are up more than 20% so far in 2014 vs. about 9% for the S&P. That kind of outperformance in a volatile market is incredibly noteworthy.

Looking forward, healthcare stocks should continue their run through the end of 2014 — and into 2015, too.

Remember, consumers will cut back on just about anything before they stop paying for the treatments that reduce their pain or extend their lives. That makes the healthcare sector recession-proof.

Furthermore, with the demographic tailwind of aging Baby Boomers and more American healthcare “customers” insured under Obamacare, there’s plenty of growth at home in this sector.

Throw in emerging markets, where healthcare spending continues to grow as a more profitable middle class in Latin America and Asia starts spending on their health and wellness, and there’s a compelling case for a long-term investment in healthcare even after this big run already.

That’s particularly true for big-name healthcare stocks growing their dividends as well as their earnings. After all, if you’re going to ride the long-term growth in healthcare for years to come, why not get a 2%, 3% or even 4% dividend yield in addition to the share price appreciation as you wait?

By my estimation, there are five healthcare stocks with growing dividend yields that are a cut above the rest.

Healthcare Stocks: Ventas (VTR)

ventas-vtr-185Dividend Growth: 43% in five years, from 51 cents in 2009 to 73 cents now
Current Yield: 4.2%
Market Cap: $20.3 billion
YTD Return: +20%

Ventas, Inc. (VTR) is a real estate investment trust that focuses on healthcare related facilities, particularly those that specialize in senior housing and elder care. Its reliable revenue stream makes it one of the best healthcare stocks to buy, and the dividend yield makes VTR all the more attractive.

VTR stock is a great way to marry the stability of healthcare with the income mandate of REITs. As Baby Boomers age, they will increasingly need long-term care from facilities like those run by Ventas — everything from cute care and hospice services to simply 55+ apartments for those without major health problems. And that monthly “rent” provides for reliable revenue and reliable dividends.

The company also trades at a fair 15-times fiscal 2015 earnings forecasts, so you don’t have to worry about overpaying despite the outperformance lately; Ventas stock is fairly valued.

Healthcare Stocks: HealthSouth (HLS)

healthsouth-hls-185Dividend Growth: 17% this year, after its reinstated dividend jumped from 18 cents in 2013 to 21 cents
Current Yield: 2.1%
Market Cap: $3.5 billion
YTD Return: +19%

HealthSouth Corporation (HLS) is a rehabilitation company has a rather colorful past, including a massive accounting scandal about a decade ago that nearly led to its bankruptcy. However, the company mended its ways and has been growing briskly since the Great Recession thanks to aging Boomers that increasingly need rehab after injuries or surgeries.

HealthSouth doesn’t have a very big dividend history compared to other healthcare stocks — it only started paying shareholders about 18 months ago. But the recent bump in the dividend and the very sustainable payout ratio of just 16% make HLS a dividend growth stock to keep in mind.

Healthcare Stocks: Chemed (CHE)

chemed-185Dividend Growth: 83% in five years, from 12 cents quarterly in 2009 to 22 cents now
Current Yield: 0.8%
Market Cap: $1.8 billion
YTD Return: +39%

Shifting demographics in America is a great growth opportunity for Chemed Corporation (CHE). Chemed is a leader in home health services, including personal hospice care, and as Baby Boomers age and seek to receive care at home, this growing player is a no-brainer for your portfolio.

Chemed stock is up 35% year-to-date in 2014, showing great outperformance, even among healthcare stocks. And while the dividend isn’t much right now at a yield of just 0.8%, the dividend growth is indeed impressive. Chemed has nearly doubled its payouts in the last five years — and since it is paying out just 18% of total earnings in dividends, there is plenty of room for future dividend growth, too.

If you’re looking for healthcare stocks with big growth potential, look no further than this small-cap player that focuses on home health services. If you’re patient, the dividend could soon grow to a substantial level — and if outperformance continues, you’ll have a nice share appreciation to boot.

Healthcare Stocks: WellPoint (WLP)

wellpoint185Dividend Growth: 75% in four years, from 25 cents quarterly in its first dividend in 2011 to 43.75 cents now
Current Yield: 1.4%
Market Cap: $34 billion
YTD Return: +37%

WellPoint Inc. (WLP) is a major insurance carrier, and the No. 1 beneficiary from Obamacare enrollments. According to reports, the company had 400,000 new enrollees at the end of Q1 and had said its policies were already running at a profit. That total was estimated to have hit almost 770,000 new enrollments by midyear — far surpassing the company’s targets of 600,000.

This big success winning Obamacare enrollees is surely a sign of growth to come for WLP. It’s hard to dispute that navigating this complicated marketplace to win new business speaks highly of the management at this company and their ability to seize new opportunities.

In the bigger picture, WLP is the second-largest health insurer in the U.S., and already had the scale to hang tough in any market. But this Obamacare momentum coupled with a return to consumer-facing marketing should help it grow even more.

Among big-name healthcare stocks, WLP admittedly doesn’t have the most attractive dividend in the world right now. But it has grown distributions rapidly since initiating its dividend in 2011.

Also, despite a big run in 2014, WellPoint Inc. trades for just 13.5 times forward earnings.

Healthcare Stocks: Johnson & Johnson (JNJ)

jnj stock Johnson & JohnsonDividend Growth: 43% in five years, from 49 cents quarterly in 2009 to 70 cents now
Current Yield: 2.6%
Market Cap: $300 billion
YTD Return: +19%

We’ll end on a “boring” note with an old favorite in Johnson & Johnson (JNJ). No matter how stodgy you think this company is, there’s a lot to be said for having this rock-solid company as part of your portfolio’s foundation.

It’s a hybrid healthcare and consumer staples play thanks to popular brands including Band-Aid, Tylenol and Splenda, and that makes this megacap pretty darn bulletproof.

Many investors soured on Johnson & Johnson after the company struggled from 2010 to 2012 amid quality-control issues and big product recalls. However, JNJ has roared back since January 2013, gaining about 50% to outperform the S&P 500. And that run for JNJ stock doesn’t even include the returns from JNJ’s juicy dividends, either.

Johnson & Johnson is fairly valued at 16 times 2015 earnings, and is scheduled to pay out only about 45% of those projected earnings in dividends so there’s room for future increases.

And if that doesn’t convince you of stability in JNJ, consider that this company is one of just four players with a AAA credit rating, boasts over $33 billion in cash on the books and clears $17 billion annually in operating cash flow.

If you’re looking for stable, long-term healthcare stocks, there are few options better than Johnson & Johnson stock.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP


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