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How to Pick the Best High-Yield Stocks in Big Pharma

But it's not just about dividends — it's about reducing risk, too

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Big pharma is a good sector to explore right now amid the dividend craze. Obviously, high-yield stocks are in favor as rates remain paltry elsewhere — 1.6% or so in 10-year Treasuries and 1.9% or so in five-year CDs as of this writing.

Of course, those dividends only matter if other troubles don’t erode share prices and leave you with a small quarterly payday but a big capital loss in shares.

Big Pharma stocks clearly have the yield. And in my opinion, they have the broader stability that makes them attractive as defensive investments. The health care sector is recession-proof — since folks spend money on drugs and treatment no matter what the marcoeconomic picture is.

These Big Pharma stocks also have growth in their future thanks to demographic trends. As the baby boomers age, the need for health care devices and services will only grow.

So the only question, then, is finding individual companies in Big Pharma that can overcome any patent issues and short-term troubles and cash in on these big long-term trends.

While delivering a high dividend, yield of course.

Here’s a list of the players (pharmaceutical stocks over $100 billion in market cap) and their current dividend yields:

  • Abbott Laboratories (NYSE:ABT), $104 billion market cap, yields 3.1%
  • GlaxoSmithKline (NYSE:GSK) $116 billion market cap, yields 4.8%
  • Johnson & Johnson (NYSE:JNJ) $188 billion market cap, yields 3.6%
  • Merck & Co. (NYSE:MRK) $134 billion market cap, yields 3.8%
  • Novartis (NYSE:NVS) $143 billion market cap, yields 4.2%
  • Pfizer (NYSE:PFE) $178 billion market cap, yields 3.7%
  • Sanofi (NYSE:SNY) $111 billion market cap, yields 4%

A balanced portfolio needs only one or two of these stocks, so now our goal is to take the best from this list.

Five of these players actually have a negative growth rate in earnings over the past five years. The worst is Merck, with an 8% slide annually, while Sanofi is barely in the red with less than a 1% decline on average across the past five years.

The only two boasting a positive growth rate are Abbott and Pfizer. And frankly, I like both.

The Case for Abbott

Take Abbott, which might surpass Pfizer’s heart drug Lipitor with its Humira arthritis medication as the best-selling drug ever thanks to its later patent expiration of 2017. That ensures stability in the short term, and the cash to formulate a Plan B.

And in the meantime, Plan A is working fine. Abbott is riding 13 consecutive quarters of year-over-year revenue growth, and recently posted strong earnings and reaffirmed its outlook despite a stronger dollar creating headwinds. Shares are up 17% year-to-date in 2012.

Abbott also is planning a unique $15 billion spin-off called AbbVie, which will become a new publicly traded stock and manage Abbott’s research-based pharmaceuticals business. The deal will close by the end of 2012. The icing on the cake is a 3.1% yield, which is the lowest of its peers but has been raised annually for 40 straight years. That’s a reliable payday you can count on growing over time, not just paying out each quarter.

The forward P/E ratio of 12.3 is a bit higher than its peers, but still pretty affordable. After gains of 31% in the past 12 months, there is a small risk of buying a top, but ABT remains one of the best picks in Big Pharma.

Article printed from InvestorPlace Media,

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