Why You Should Buy and Hold These High Yielding Dividend Stocks

Eeven with the S&P500 down 9% since the start of the year, the index returns only 1.4%. This is well below the average historical return of 4.3% over its history. With such a low dividend yield, income investors might not be able to rely on owning index funds that track the S&P 500.

Fortunately, some stocks pay higher dividends that are relatively safe. Pharmaceutical inventory Merck (NYSE: MRK) seems to be one of those stocks. Let’s explore several factors that could make Merck an attractive option for income investors also looking for growth prospects.

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Last month, Merck reported strong results for 2021. The company posted revenue of $48.7 billion, a 17.3% increase from 2020. Meanwhile, its profit per non-GAAP (adjusted) share price (EPS) climbed 32.9% year-over-year to $6.02. Its non-GAAP net margin was equally impressive, increasing nearly 370 basis points to 31.4% in 2021.

So how did the company generate such tremendous growth? And what are the prospects for the company and its investors now? We’ll take a look.

A robust product portfolio

View Merck’s leading portfolio of medicines, vaccines and animal health products to understand the company’s strong recent results.

Sales of Merck’s crown jewel, cancer drug Keytruda, increased 19.5% year-over-year to $17.19 billion in 2021. Keytruda’s significant growth stems from the fact that the drug received eight additional US Food and Drug Administration (FDA) approvals in 2021. One of the largest FDA approvals came last August to treat patients with cell carcinoma kidney disease, which I believe would add $400 million to Keytruda’s annual sales.

Merck’s human papillomavirus (HPV) vaccine, named Gardasil/Gardasil 9, saw sales jump 44.1% year-over-year to $5.67 billion l last year. Since the Gardasil vaccine can prevent some HPV-related cancers, demand for the vaccine is likely to only increase in the future. In fact, CEO Rob Davis pointed out in the company’s recent earnings call that he believes Gardasil will be able to double its sales by 2030 thanks to this growing demand.

Finally, Merck’s animal health segment generated $5.57 billion in sales last year. This represents a growth rate of 18.4% over the previous year. Growth in Merck’s animal health segment was primarily driven by its Bravecto product line (used to kill adult fleas and ticks on cats and dogs).

A promising drug pipeline

Merck’s results for the past year were encouraging. But were they just a one-time event? Or can investors expect stronger growth in the future? I believe the latter to be true.

The company has a deep drug pipeline of 71 programs in phase 2 clinical trials and 25 programs in phase 3 clinical trials. As such, the company should have more than enough new drug indications on the market to drive its future growth.

This is precisely why analysts are forecasting 10% annual earnings growth over the next five years from the $6.02 base for 2021.

A sustainable distribution rate

Merck’s appeal doesn’t end with its excellent operating fundamentals. Income investors should be pleased with the stock’s low payout ratio of 43.2%.

That should give it the flexibility to build on its 11-year streak of dividend increases in the years ahead. Indeed, Merck retains the majority of its capital to focus on acquisitions, debt repayment and share buybacks to further strengthen the business.

Merck’s safe dividend payout ratio and bright earnings growth outlook prompted the stock to recently increase its quarterly dividend per share by 6.2% to $0.69. The combination of its 3.6% dividend yield with annual dividend growth of over 6% makes it an attractive dividend growth stock.

An unappreciated stock

Merck appears to be a fundamentally sound company. But it doesn’t seem like the market is giving the stock the recognition it deserves.

The stock trades at a forward price-to-earnings ratio of 10.6, which is slightly below the overall drugmaker industry average of 10.8. Given that the average analyst forecast of 10% annual earnings growth for Merck is above the industry average of 7%, Merck should arguably be trading at a premium to its industry.

Merck also appears to be discouraged over its own history. The stock’s 3.4% rolling dividend yield is slightly above its 13-year median yield of 3.3%. Given that Merck’s fundamentals may be better than ever, the stock should trade higher than its current price of $76 per share.

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Kody Kester owns Merck & Co. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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