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Dividend Stocks With a Healthy Outlook


Which health-care stocks to buy -- and avoid -- for income investors.

It's hard to play the stock market as a long-term investor and watch some of your stocks take the occasional dramatic nosedives, but it helps when those stocks are sending you a check every quarter.

Dividend stocks can be the biggest blessing to investors' morale (and their pockets), but it helps to know which companies to sink your money into. Health-care stocks in particular have always been known for their generous dividends. These stocks have been a great investment throughout the recession, as many health-care companies have been able to sustain their profits despite the downturn. In the two-year period ended in January, the S&P 500 was down 22% while the Health-care sector was off by 6.6%. Some investors might question the future dividend returns on these stocks as the patent cliff approaches, but analysts agree that these stocks will still pay out.

"Some of the pharmaceutical stocks have great stable dividends as well as some potential for capital appreciation," says Morningstar equity analyst Damien Conover. "The dividends are pretty secure on some solid cash flow, even with some of the patent erosion that comes with these names, so you are looking at dividend yields of 4% to 5%."

Conover recommends Abbott Laboratories (ABT) and Pfizer (PFE) as two of the best picks for investors.

Abbott announced on Friday that it was increasing its quarterly dividend by 10% to $0.44 per share, marking the 38th consecutive year that the company has increased its dividend payout. It has a yield of 3.2% and currently trades at about $54 per share. The stock is included on Standard & Poor's 500 Dividend Aristocrats list, which measures the performance of stocks that have increased their dividends consistently over the last 25 years. The company has almost doubled its dividend every six years.

Meanwhile, Pfizer is a strong stock that has a dividend yield of 4.02%, paying out $0.18 per share quarterly. The company cut its dividend at the beginning of 2009 as a means of financing its acquisition of Wyeth, but the company has already raised it since. Prior to the Wyeth purchase, the dividend has been strong. Conover says it's a buy.

The S&P 500 Dividend Aristocrats list currently has total returns of 2.19%, whereas the S&P 500 has a year-to-date total return of (0.24%). Other health-care stocks on the list include Eli Lilly (LLY) and Johnson & Johnson (JNJ), with yields of 5.67% and 3.08%, respectively.

EDMP Investment Management Co-Founder and Chief Investment Officer Chuck Carnevale says to be weary of Eli Lilly because of its problems padding its pipeline. He believes the company will not be able to hold on to its current dividend yield. Carnevale says to stay away from Merck (MRK) and Bristol-Myers Squibb (BMY) as well. He expects the yields on these dividends will stay flat year-over-year.

But Carnevale does recommend buying into Johnson & Johnson. The company has doubled its dividend every five to seven years and has had a historically strong dividend. Johnson & Johnson currently pays out about $1.96 per share annually. Carnevale points to the company's solid balance sheet and its potential for double-digit growth.

"It's not only important to look at the current yield, but how well that current yield is protected -- whether the company has the potential to cut their dividend in the future," says Carnevale. He adds that looking at how fast that yield will increase is also a major factor in what stocks to play when looking at dividends.

Carnevale points out that the current health-care climate is changing drastically. "You want to look at companies that are opportunistically part of the solution, and not part of the problem. These companies should have the opportunity to participate in whatever changes are coming and not be weakened by new legislation."

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No positions in stocks mentioned.

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