6 Pharmaceuticals Paying 3%

Includes: ABT, BMY, JNJ, LLY, MRK, PFE
by: The Value Investor

With interest rates near zero the focus of investors shifts to high-dividend yield stocks. This is especially true for the elderly, who are saving for retirement. In the following article I will run through 6 stable pharmaceutical companies, each paying at least a 3% yield to investors. These could form a base for each retirement portfolio.

Diversified pharmaceutical basket

An investor searching for yield in stable large pharmaceutical companies could invest in the following names: Eli Lilly (NYSE:LLY), Merck & Co (NYSE:MRK), Bristol Myers Squibb (NYSE:BMY), Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ) and Abbott Laboratories (NYSE:ABT).

Each of these companies pay a dividend of 3% or more and have a market capitalization exceeding $40 billion.

The basked comprised out of an even shares in each of the six names would provide a 4.1% dividend yield. Shares are valued at an average of 3.0 times book value and 17 times earnings.

(Click to enlarge)

Long-term returns

Investors who invested in this basket five year ago would have seen a decline in the value of their holdings of 2%. This compares to the SP500 which traded flat over the five year period.

The slightly negative return does exclude the annual dividend yield exceeding 4%, which is above market average.

Despite the fact that returns are in line with the rest of the general market, volatility of returns on a portfolio level is much less as pharmaceutical companies are typically in a defensive industry (individual stocks can show more volatility especially around announcements of new medicines and FDA drug approvals).

The industry has been struggling over the last decade having to deal with expiring patents and low cost generic drug providers. On top of that they got a lot of competition from smaller, more focused biotechnology companies.

(Click to enlarge)

Margin of safety for retirement

Traditionally, many investors had a sizable bond portfolio in order to comfortably retire. With bond yields being completely insufficient to generate comfortable returns, many investors have fled to equities. Utility companies with their stable long-term demand and favorable state laws provide the best of both worlds. They pay a yield, which bonds fail to provide at the moment, while having the same upside as the general equity market.

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