Hi, I'm Jimmy in this video, I'm going to walk through my top three dividend stocks
from the health care sector.
This video is part of our passive income from dividend series where we're going through
each of the 11 GICS sectors and try to identify a handful of dividend stocks that could do
well and ultimately get our get.
Each of us closer to our goal of financial freedom.
Okay.
Simple enough.
Now, so far in this series, I've been trying to identify both European and U.S. stocks
that could do well going forward, but actually struggled in this particular sector to find
great European dividend stocks in the health care sector.
Because of that, I've focused mostly on the US stocks, although stick around to the end
because I've got a couple ones that also trade in Europe.
So to make this list, I created a few fundamental sort of guidelines that each company has to
meet in order to make this list.
They have to have a dividend yield above 2 percent.
They have to have a strong dividend coverage ratio and ideally they should be able to grow
their dividend.
Now, if you happen to know any great European dividend stocks that meet these criteria,
please put them in the comments below.
I'd be curious to see which ones everybody comes up with.
Okay, let's jump into our first U.S. dividend stock.
First up, we have Johnson and Johnson, ticker symbol JNJ.
Now, Johnson and Johnson has a dividend yield of a bit more than two and a half percent.
And Johnson and Johnson manufactures and sells a ton of products.
They have a large pharmaceutical division.
They sell skin and hair care products.
They have over-the-counter medicines.
They sell medical devices.
And the list goes on and on.
When we look at their dividend per share, well, this is exactly what we would expect,
a very consistent, steadily growing dividend per share from a pharmaceutical type company.
These are the older, more established companies out there that are likely to going to be able
to continue to pay their dividends despite what the economy does.
These tend to be very defensive dividend stocks and we could see that.
Analysts are expecting that to continue.
Analysts estimates are the green bars.
So it looks like they expect that to continue on from here.
When we add earnings per share to this chart, well, we can see that earnings more than cover
the amount of dividends that they've been currently paying out.
That's likely to be a good thing for the sustainability of those dividends.
Now, I mentioned that it's important when I was screening for these companies that they
each of these companies have a strong dividend coverage ratio.
If you're curious about that, just as an example, if we take the 2018 numbers while we take
their adjusted earnings per share of about six thousand eighty cents per share, we divide
that by their dividend of three dollars and 50 cents and we get a dividend coverage ratio
of 1.9X.
That's pretty good.
Okay.
So overall, JNJ looks like a solid dividend stock.
Next up, we have Cardinal Health Ticker Symbol CAH.
Cardinal Health is one of the leading pharmaceutical and medical distributors in the world and
they have a dividend yield of about three and a half percent.
When we look at their dividend per share, well, once again, we can see that they've
been quite consistent.
But then when we add profits to this whole thing, well, we can see that this story gets
a bit more interesting here.
We can see that their profits per share had a big drop back in 2018, and that happened
because they ran into some supply chain and operational issues.
Well, clearly, it looks like a lot of those issues have been sorted out since 2019.
Earnings per share got much better.
And we end up with a pretty good dividend coverage ratio of almost 2x in 2019.
Now, that's actually the primary advantage.
It's a reason why I have the different coverage ratio rule in there because that gives us
a little bit of wiggle room if a company runs into problems.
Typically, I like to have companies that have somewhere between a 1.5X and 2X, which gives
you the wiggle room we need.
So this 1.95X is what I think they actually have.
That's much better in my opinion.
Now for looking for more growth.
What we'd want our dividend coverage ratio to be much higher since in theory that would
mean that they're paying out a smaller piece of their dividends and they could use the
rest of the company, the rest of the cash to fuel the company growth.
If we want more dividends or we want a lower dividend coverage ratio implying that they're
paying out a larger percentage of their their profits as dividends for that would probably
run companies like our Real Estate Investment Trust or REITs or a master limited partnership,
which is MLP for sure.
Those tend those types of companies tend to pay out a larger percentage of profits.
Okay.
Let's jump to our next company, Pfizer.
Ticker symbol PFE Pfizer is a solid dividend yield of about three point seven percent and
they're one of the stronger pharmaceutical companies out there.
When we add their dividends per share chart, well, there we can see that they've been quite
stable.
And what we really expect from a solid health care or defensive dividend stock, when we
add adjusted earnings per share to this, well, we can see that dividends have been consistently
covered on an annual basis.
Their profits.
I know some of their quarterly numbers didn't quite meet the meet what they needed, but
overall their annual numbers are getting there, which I think is the most important thing
for most dividend stocks.
Now, the 2018 dividend coverage ratio is the lowest of the three stocks we've looked at
so far with about one point six acts.
But if we believe analysts.
Well, looks like they're expecting about 2x in 2019.
And I think that this is very reasonable considering that three quarters of 2019 have already been
completed.
And all signs are that the fourth quarter should get them at least relatively close
to their 2 times dividend coverage ratio.
Okay.
Now get a few other dividend stocks that I thought I really wanted to add to this list,
but frankly, they didn't meet one or two of the criteria.
So what I'm going to end up doing is adding them to the dividend watch list.
So the first one is McKesson ticker symbol MCK that trades in both the U.S. and in Germany
under the same ticker.
This is a chart of both profits and dividends per share.
And clearly, they're doing a fantastic job.
Profits are doing a fantastic job of covering their dividends.
But this brings us to the issue right now.
McKesson only has a dividend yield of about 1 percent.
So it makes sense, I think, to add this to the watchlist in hopes that they one day increase
their dividend, which they can clearly do.
Okay.
Next up, I was considering Glaxo SmithKline ticker symbol GSK in London and their ADR
in the U.S. trades under the same ticker here.
The issue is the consistency of their earnings per share.
Their dividend has been quite consistent.
But I think that the dividend is frankly a bit too high.
So I think until they get the volatility of their earnings under control, I think it's
best to keep them on the sidelines for now.
Now, I've actually gotten a few comments recently on some of the videos asking do I think that
if do I think that dividend stocks are better, then let's call them non dividend paying stocks.
And I think a lot of that depends on each of our individual goal of investing.
I think they can be much better in some situations.
I actually did a video called The Dogs of the Dow where I analyzed the popular dividend
strategy called the dogs of the Dow.
And that strategy has done impressively well.
So if you're curious about building a better dividend portfolio, that could be a good next
video to watch.
I've got a link here.
I got a link in the description below.
Thank you so much for stick with me all the way into the video.
Hopefully I'll see over in that video.
Thanks.
I'll see in the next one.