We've all heard that you shouldn't judge a book by its cover, but income-seeking investors sometimes forget this lesson when it comes to picking stocks. Dividend Aristocrats are stocks in the S&P 500 index with at least 25 consecutive years of payment increases under their belts, and most of them get more attention than they deserve.
Reliable dividend-paying stocks are a great way to generate a passive income. If you're determined to stick with the elite group of Dividend Aristocrats, though, at least stick with ones that have a good chance of outperforming the overall market.
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This pair of related healthcare companies have been paying and raising their quarterly dividends for five long decades. Best of all, their best days could lie ahead.
1. Abbott Laboratories
Abbott Laboratories (ABT -0.71%) is a diversified healthcare conglomerate with a hand in diagnostics, medical devices, and nutrition. A diverse collection of businesses helped it increase its dividend payout for the 50th consecutive year last December.
Abbott got a lot of unflattering attention when the closure of one of its baby food manufacturing plants led to a national shortage of specialty formulas. Investors seeking steadily rising payouts will be glad to know the specialty nutrition market isn't the only reliable industry where the company has an advantage.
At recent prices, Abbott shares offer a 1.7% yield. That isn't too enticing now, but its payout could grow by leaps and bounds over the next several years. In May, the FDA cleared Abbott's next-generation constant glucose monitoring (CGM) device.
The tiny Freestyle Libre 3 is smaller than CGMs from its nearest competitor, the G7 from Dexcom. Abbott's device also has a head start. The FDA still hasn't cleared the G7 and it isn't expected to begin a U.S. launch until 2023.
With more than one reliable revenue stream Abbott has been able to raise its payout by 77% over the past five years, and it could start growing even faster. The U.S. Centers for Disease Control think there are more than 37 million Americans with diabetes right now, and Abbott has what could be the leading CGM for the foreseeable future.
2. AbbVie
AbbVie (ABBV 1.50%) was spun off from Abbott Laboratories in 2013 to shield Abbott's shareholders from the impending end of market exclusivity for the world's top-selling anti-inflammatory drug, Humira. Sales of Humira plus a growing roster of younger drugs have helped the company raise its payout a stunning 120% over the past five years.
Now, AbbVie shares offer an above-average dividend yield of 4% because investors are worried the company's bottom line can't keep growing. In the U.S. this spring, Humira began competing with lower-cost biosimilar versions, and sales will most likely drop significantly in the second half of the year.
U.S. sales of Humira that reached $4.7 billion in the second quarter were responsible for 32% of total revenue. Luckily, AbbVie has new drugs that could more than offset the losses. In 2019, the FDA approved Skyrizi, a psoriasis injection, and Rinvoq, an arthritis drug. This pair is on pace to record $7.3 billion in combined sales this year, and AbbVie thinks they can pass $15 billion in 2025.
U.S. Humira sales that drop faster than AbbVie's younger product lineup could make growth hard to achieve over the next year or two. Investors who appreciate steady dividend raises will be glad to know the company can meet and raise its payout even if Humira sales start plummeting.
Over the past year, AbbVie used just 43.5% of the free cash flow its operations generated to meet its dividend obligation. With a well-funded dividend program and new growth drivers to fill in for Humira's impending losses, this stock has a good chance of outperforming over the long run.
