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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 years 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 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.

Below, we provide a list of the top 40 S&P 500 Healthcare Stocks by market cap and rank them based on their annualized dividend yields. (The sector classifications are sourced from Finviz and the market data are sourced from Fidelity)The stocks with dividends and no dividends, and their performances are shown below:

STOCKS WITH DIVIDEND YIELDS

Dividend Yield

YTD Return

Eli Lilly & Co

LLY

5.12%

12.25%

Bristol-Myers Squibb Company

BMY

4.61%

12.26%

Merck & Co. Inc.

MRK

4.45%

-3.15%

Pfizer Inc.

PFE

4.16%

12.18%

Abbott Laboratories

ABT

3.74%

10.13%

Johnson & Johnson

JNJ

3.52%

6.62%

Medtronic Inc.

MDT

2.69%

-1.02%

Baxter International Inc.

BAX

2.13%

16.20%

Amgen Inc.

AMGN

2.05%

-0.36%

Becton, Dickenson and Company

BDX

1.96%

-0.08%

St.Jude Medical Inc.

STJ

1.81%

9.72%

Covidien plc

COV

1.58%

12.57%

WellPoint Inc.

WLP

1.48%

19.64%

Aetna Inc.

AET

1.45%

37.02%

Humana Inc.

HUM

1.34%

36.67%

Stryker Corp.

SYK

1.32%

1.82%

Unitedhealth Group Inc.

UNH

1.31%

38.28%

CR Bard Inc

BCR

0.77%

8.11%

Quest Diagnostics

DGX

0.74%

0.60%

Allergan Inc.

AGN

0.25%

19.20%

CIGNA Corporation

CI

0.08%

35.87%

AVERAGE

13.55%

STOCKS WITH NO DIVIDEND YIELDS

Dividend Yield

YTD Return

Gilead Sciences Inc.

GILD

0.00%

16.89%

Express Scripts Inc.

ESRX

0.00%

0.39%

Celgene Corporation

CELG

0.00%

0.27%

Biogen Idec Inc.

BIIB

0.00%

51.93%

Thermo Fisher Scientific Inc.

TMO

0.00%

8.54%

Intuitive Surgical Inc.

ISRG

0.00%

55.40%

Zimmer Holdings Inc.

ZMH

0.00%

11.81%

Boston Scientific Corporation

BSX

0.00%

-5.42%

Forest Laboratories Inc.

FRX

0.00%

15.88%

Mylan Inc.

MYL

0.00%

7.81%

Laboratory Corp. Of American Holdings

LH

0.00%

3.23%

Watson Pharmaceuticals

WPI

0.00%

29.97%

Hospira Inc.

HSP

0.00%

-8.21%

Edwards Lifesciences Corp.

EW

0.00%

-11.74%

Waters Corp.

WAT

0.00%

13.10%

Life Technologies Corp.

LIFE

0.00%

-18.86%

DaVita Inc.

DVA

0.00%

20.22%

Varian Medical Systems

VAR

0.00%

-9.41%

Cephelon Inc.

CEPH

0.00%

29.52%

AVERAGE

11.12%

Since the beginning of this year, the top 40 S&P 500 healthcare stocks gained 12.40%, beating the SPY by a large margin. During this period, the average return of the dividend yielding S&P 500 healthcare stocks was 13.55% vs. 11.12% for the second group of stocks with no dividend yields. This is even better than we expected.

We prefer high dividend stocks over low or no dividend stocks since the former provides better protection in down markets and the returns are comparable in up markets. Here are the top ten S&P 500 healthcare stocks with the highest dividend yields:

1. Eli Lilly & Co is a large pharmaceutical company operating worldwide. LLY has a 5.12% dividend yield and returned 12.25% since the beginning of this year. The stock has a market cap of $44.34B and P/E Ratio of 9.01. Jim Simons had more than $200M in LLY at the end of March 2011. (See Jim Simons’ favorite stocks.)

2. Bristol-Myers Squibb Company is a global pharmaceutical company. BMY has a 4.61% dividend yield and returned 12.26% since the beginning of this year. The stock has a market cap of $48.88B and P/E Ratio of 14.93. Both Samuel Isaly and Jim Simons hold more than $100 Million of BMY.

3. Merck & Co. Inc. is a leading healthcare and pharmaceutical products company. MRK has a 4.45% dividend yield but lost -3.15% since the beginning of this year. The stock has a market cap of $105.35B and P/E Ratio of 36.70. Ric Dillon holds the largest MRK position among the 300+ funds we are tracking.

4. Pfizer Inc. is a leading pharmaceutical company providing medicines for both human and animals worldwide. PFE has a 4.16% dividend yield and returned 12.18% since the beginning of this year. The stock has a market cap of $152.09B and P/E Ratio of 18.16. David Einhorn’s Greenlight Capital holds more than $500 Million of PFE. (Check out Einhorn’s other stock picks) Ken Fisher, Lee Ainslie, David Tepper and Phill Gross are also among PFE investors.

5. Abbott Laboratories is another multinational pharmaceutical company on our list. ABT has a 3.74% dividend yield and returned 10.13% since the beginning of this year. The stock has a market cap of $79.70B and P/E Ratio of 15.19. Ken Fisher had more than $400 million in ABT at the end of March.

6. Johnson & Johnson is a global corporation that provides consumer healthcare and pharmaceutical products. JNJ has a 3.52% dividend yield and returned 6.62% since the beginning of this year. The stock has a market cap of $177.60B and P/E Ratio of 15.50. Warren Buffett holds a massive $2.5 Billion of JNJ.

7. Medtronic Inc. is a large medical technology company mainly providing device-based medical therapies worldwide. MDT has a 2.69% dividend yield but lost -1.02% since the beginning of this year. The stock has a market cap of $38.25B and P/E Ratio of 12.60. John Paulson holds more than $350 Million of MDT.

8. Baxter International Inc. is a healthcare company that provides medical supplies to treat various human diseases. BAX has a 2.13% dividend yield and returned 16.20% since the beginning of this year. The stock has a market cap of $13.18B and P/E Ratio of 15.89. John Paulson had the largest position in BAX, holding more than $400M of the stock.

9. Amgen Inc. is one of the leading biotechnology companies in the world. AMGN has a 2.05% dividend yield but lost -0.36% since the beginning of this year. The stock has a market cap of $50.86B and P/E Ratio of 11.37. Phill Gross’ Adage Capital holds the largest AMGN position among the 300-plus funds we are tracking.

10. Becton, Dickenson and Company is an American healthcare equipment company providing medical devices worldwide. BDX has a 1.96% dividend yield but lost -0.08% since the beginning of this year. The stock has a market cap of $18.29B and P/E Ratio of 16.08. Al Gore’s Generation Investment Management and David Einhorn’s Greenlight Capital are the most prominent BDX investors.

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, And 10 to Consider