Hockey great Wayne Gretzsky famously said: “I skate to where the puck is going to be, not where it has been.”
I think the concept definitely applies to investing in dividend stocks. Don’t just look at the stocks with the highest dividends now. Try to identify the ones that could have the best dividends down the road.
Amgen (NASDAQ: AMGN), AbbVie (NYSE: ABBV), and Johnson & Johnson(NYSE: JNJ) are three big pharma stocks with the fastest-growing dividends over the past three years. Could these be the best dividend stocks of the future?
Amgen initiated its dividend program in 2011. At the beginning of 2014, the big biotech paid a quarterly dividend of $0.61 per share. As of this year, Amgen’s quarterly dividend stood at $1.00 per share — an increase of nearly 64% in just three years.
This fast growth isn’t likely to end anytime soon. Amgen recently announced yet another dividend hike of 15% effective in the first quarter of 2017. The company uses less than 38% of its earnings to pay dividends, so there’s room for even more increases down the road.
Let’s suppose you bought Amgen shares now and held on to them for 10 years. If the company keeps increasing its dividend by 15% per year during that period, by 2027 you’d be receiving quarterly dividends of more than $4 per share. That would reflect a yield of roughly 11% on your initial investment assuming no dividends were reinvested during the period.
Top-selling drug and a top-paying dividend
When AbbVie was spun off by Abbott Labs in 2013, the company inherited one of the biggest blockbuster drugs in the world, Humira. AbbVie also inherited a tradition of paying attractive dividends. Over the past three years, the company increased its dividend by more than 40%.
AbbVie kept its commitment to increasing its dividend going with another 12.3% bump announced in October. The company returns 60% of its earnings to shareholders in the form of dividends, so there’s no problem for AbbVie with continuing the streak into the future.
If AbbVie keeps increasing its dividend every year over the next decade at the same level of its recent dividend hike, investors who buy shares now will be richly rewarded. That level of sustained increases would result in a yield of nearly 12% on the initial investment assuming no dividend reinvestment.
Long-time dividend winner
Johnson & Johnson has a track record that few others can claim. The healthcare giant has increased its dividend for 54 years in a row. Over the past three years, J&J’s dividend has grown by more than 20%.
J&J’s latest dividend hike came in April, when its board of directors approved an increase of 6.7%. The company uses roughly 54% of its earnings to fund dividend payments. As is the case with Amgen and AbbVie, Johnson & Johnson shouldn’t have any problems keeping the dividend increases coming.
How would our theoretical exercise of buying and holding J&J stock work out? Assuming the company continues to raise its dividend by 6.7% each year over the next 10 years, an investor would enjoy a yield of 5.3% on his or her initial investment in 2026.
Skating on thin ice?
There’s one problem with projecting dividend payments years into the future: There’s no guarantee that a company can continue increasing dividends as it has in the past. Amgen, for example, faces headwinds for its top-selling drug Enbrel. AbbVie could have to fight off biosimilars for Humira within the next few years. J&J has some challenges with its consumer and medical device segments.
But will these three companies continue to raise dividends for the foreseeable future? I think so. We might not be able to know exactly where the metaphorical puck is going, but by buying shares of Amgen, AbbVie, and Johnson & Johnson, investors can feel confident that they’re not skating on thin ice.
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