There is a lot of money flowing through the U.S. healthcare industry. According to the Centers for Medicare & Medicaid Services, America's total health expenditures were $4.1 trillion in 2022, and that number has likely increased since then. People have always, and will always, need care, so healthcare is a great place to look for dividend stocks.
Pharmaceuticals and insurance are among the most lucrative pockets within America's healthcare system, so start there. I found two blue chip stocks trading at bargain prices, with impactful dividends poised to grow over the coming years. Consider them when you're putting new capital to work for your portfolio this month.
A pharmaceutical giant with an uncharacteristically generous dividend yield
Pfizer(NYSE: PFE) is a household name in the pharmaceutical industry, dating back to the mid-1800s. The company's COVID-19 vaccine (Comirnaty) and treatment (Paxlovid) caused surging growth that lasted for a couple of years, but has largely dried up since then. The market has frowned on Pfizer's declining top and bottom lines, pushing its share price to below where it was before the pandemic.
Yet, the stock is compelling for two reasons. First, its dividend yield is abnormally high at 6%, its highest level aside from the financial crisis in 2008-2009. High yields can signal trouble within a company, but Pfizer is financially sound. The company just raised its 2024 earnings guidance by $0.30 to between $2.75 and $2.95.
The annual dividend is $1.68 per share, which is only 61% of the low end of that guidance. Additionally, management has made it a point to emphasize Pfizer's commitment to paying and increasing its dividend as recently as its Q3 earnings call.
PFE Dividend Yield data by YCharts
Second, the company has repositioned its pipeline around oncology, using its pandemic profits to fund a $43 billion acquisition of Seagen. Pfizer anticipates that oncology will drive the company's growth through 2030.
As such, analysts estimate Pfizer will reignite growth, calling for earnings growth averaging 10.6% over the next three to five years. That's a compelling PEG ratio of 0.9 at the stock's current price-to-earnings ratio (P/E) of 9.8, making Pfizer a high-yield bargain with additional share price upside.
This insurance stock has raised its dividend by 460% over the past decade.
UnitedHealth Group(NYSE: UNH) is one of the world's largest companies (regardless of industry), with an annual revenue approaching $400 billion.
Remember how I mentioned that trillions of dollars flow through the healthcare system each year? UnitedHealth keeps gobbling up more of that pie because its tremendous size allows it to offer more value at cheaper prices. It's a massive competitive advantage in a highly fragmented industry. However, UnitedHealth's success has occasionally attracted regulatory scrutiny.
Yet, the company has continued to grow, allowing UnitedHealth to pay an increasingly bigger dividend. Management has raised the dividend for 15 consecutive years, including a whopping 460% in total raises over the past decade alone. A company that can keep pulling more cash out and giving it to shareholders is usually a sign of a healthy business, and UnitedHealth surely fits that bill. The dividend is still only 30% of estimated earnings, so there is plenty of room for that dividend snowball to keep rolling and growing.
UNH Dividend data by YCharts
The stock trades at roughly 20 times earnings, and analysts estimate UnitedHealth will grow earnings by more than 12% annually for the next three to five years. That works out to a PEG ratio of 1.6, which is still quite reasonable. Generally, I'll buy high-quality stocks at PEG ratios up to about 2.0 to 2.5.
UnitedHealth has trounced the broader market over the long term, so investors can do very well by buying this dominant business at a fair price and letting it compound over time. The stock isn't quite the bargain that Pfizer is, but it's cheap enough to make UnitedHealth a compelling buy.
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*Stock Advisor returns as of November 4, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
