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Healthcare is a fast-growing industry in the United States. In our previous article, we provided National Health Expenditures (NHE) projections for the next 10 and showed that NHE as a share of Gross Domestic Product is expected to be 19.6% by 2019. As healthcare spending and costs are rising, we believe healthcare stocks will continue to be in hedge funds’ portfolios in the future.

Although healthcare stocks are promising, we believe investors should be cautious of the upcoming inflationary environment. Like Jim Rogers and Ray Dalio, we are concerned about the Fed’s inflationary monetary policy, and we think investors should pick defensive stocks with high dividend yields in order to protect themselves against inflation. Defensive investing may not provide the best returns in a bull market; however it may be a better option for the near future.

We compiled a list of top 29 US Healthcare Stocks (the sector classifications are sourced from Finviz) by market cap and ranked them based on their 12-month dividend yields. The stocks with dividends and no dividends, and their performances are shown below.

STOCKS WITH DIVIDEND YIELDS

Dividend Yield

52-week Return

Eli Lilly & Co.

LLY

5.3%

10.1%

Bristol-Myers Squibb

BMY

4.7%

20.6%

Merck & Co.Inc.

MRK

4.3%

4.7%

Pfizer

PFE

3.7%

25.2%

Abbott Laboratories

ABT

3.5%

6.6%

Johnson & Johnson

JNJ

3.3%

4.0%

Medtronic Inc.

MDT

2.2%

-4.0%

Baxter International Inc.

BAX

2.1%

22.8%

Becton, Dickenson and Company

BDX

1.8%

13.4%

Stryker Corp.

SYK

1.1%

0.4%

Unitedhealth Group

UNH

1.1%

60.9%

Aetna Inc.

AET

0.5%

32.4%

St.Jude Medical

STJ

0.4%

30.1%

WellPoint Inc.

WLP

0.3%

29.5%

Allergan Inc.

AGN

0.3%

28.8%

CIGNA Corp.

CI

0.1%

38.5%

AVERAGE

20.2%

STOCKS WITH NO DIVIDEND YIELDS

Dividend Yield

52-week Return

Amgen

AMGN

0.0%

-3.8%

Gilead Sciences Inc.

GILD

0.0%

-2.6%

Express Scripts Inc.

ESRX

0.0%

5.4%

Celgene Corp.

CELG

0.0%

-2.2%

Biogen Idec Inc.

BIIB

0.0%

94.8%

Thermo Fisher Scientific

TMO

0.0%

7.5%

Intuitive Surgical Inc.

ISRG

0.0%

-2.6%

Humana Inc.

HUM

0.0%

76.1%

Zimmer Holdings

ZMH

0.0%

2.7%

Boston Scientific

BSX

0.0%

3.0%

Mylan Inc.

MYL

0.0%

15.9%

Vertex Pharmaceuticals

VRTX

0.0%

37.5%

Life Technologies Corp.

LIFE

0.0%

5.8%

AVERAGE

18.3%

In the last 52-week period, the average return of the dividend yielding healthcare stocks was 20.2%, vs. 18.3% for the stocks with no dividends. This is even better than we expected. We prefer high dividend stocks over low dividend stocks since the former provides better protection in down markets and the returns are comparable in up markets. Six healthcare stocks with the highest dividend yields that can be picked for defensive investing are as follows:

  1. LLY is a pharmaceutical company operating worldwide. LLY recently traded at $37.23 and has a 5.3% dividend yield. LLY has the highest dividend yield among the large healthcare stocks and it returned 10.1% during the past 12 months. The stock has a market cap of $41.04 and P/E Ratio of 8.46. Recently Lilly has made an unconditional offer to acquire the animal health business of Janssen Pharmaceutica NV. Jim Simons’ Renaissance had $89 Million in LLY at the end of December.
  2. BMY is another global pharmaceutical company. BMY has a 4.7% dividend yield, which is the second highest in our list. The stock returned 20.6% to its investors during the past 12 months. The stock recently traded at $28.28. It has a market cap of $48.14B and P/E ratio of 15.80. BMY is also one of the top dividend stocks that hedge funds love. Arthur Cohen’s Healthcor has the largest position in BMY among prominent investors.
  3. MRK is one of the largest pharmaceutical in the world. MRK recently traded at $35.63 and has a 4.3% dividend yield. Hedge Funds love this stock despite its poor performance during the past 12 months. Phill Gross’ Adage, David Tepper's Appaloosa, and Bill Miller have MRK in their portfolios. The stock has a market cap of $109.85B and P/E ratio of 127.55.
  4. PFE is a leading biopharmaceutical company in the world. PFE has a 3.7% dividend yield and returned 25.2% during the past 12 months. The stock recently traded at $20.63. Hedge fund stars like Lee Ainslie, David Einhorn, David Tepper, and Curtis Schenker all own PFE in their portfolio. John Paulson also had $399 million invested in PFE shares. The stock has a market cap of $164.94B and P/E ratio of 20.17.
  5. ABT is a major drug manufacturer operating worldwide. ABT recently traded at $52.18 and has a 3.5% dividend yield. ABT gained 6.6% during the last 12 months. The stock has a market cap of $80.75B and P/E ratio of 17.63. Simons has ABT in his portfolio.
  6. JNJ is a leading pharmaceutical, medical devices and consumer packaged goods manufacturer in the world. JNJ has a 3.3% dividend yield and gained 4% during the past 12 months. The stock recently traded at $65.57. Legendary investor Warren Buffet has $2.6 billion invested in JNJ shares. Ken Fisher and Simons also have JNJ in their portfolios. The stock has a market cap of $179.35B and P/E ratio of 14.87.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Investing in High Dividend Healthcare Stocks