Investors often find solace in stocks from defensive industries, like healthcare, because these companies are generally less impacted by economic downturns and less likely to reduce their dividends. Healthcare-related needs are considered essential, unlike many technological products or services. As a result, the healthcare sector is home to strong dividend stocks that appeal to income investors. Among these, Merck and Medtronic are noteworthy examples that could potentially reward shareholders for many years.
1. Merck
Merck has experienced a challenging year with its shares declining by 4%. The pharmaceutical company’s issues stem mainly from investor concerns about possible competition for Keytruda, Merck’s well-known cancer drug and its primary growth driver. Summit Therapeutics, a clinical-stage biotech firm, is developing ivonescimab, a drug that could compete with Keytruda, particularly in the non-small cell lung cancer (NSCLC) market.
Additionally, Keytruda is set to lose its U.S. patent exclusivity in 2028, which will introduce generic competition. Nevertheless, Keytruda’s revenue is expected to grow until 2028, even if ivonescimab enters the market earlier. The FDA has approved Keytruda for numerous indications, many of which ivonescimab is unlikely to impact significantly before 2028. Moreover, Merck is developing a subcutaneous version of Keytruda, which will not lose exclusivity in 2028 and is anticipated to achieve success.
Merck faces challenges common within the pharmaceutical industry. The company has thrived for decades by consistently developing new medications, a strategy that positions it well against competitors. Merck’s pipeline includes several dozen programs, and it is continually expanding through acquisitions, including the purchase of Acceleron Pharma, which led to the approval of Winrevair for pulmonary arterial hypertension.
Merck has partnerships with smaller companies, such as Moderna, working on a personalized cancer vaccine. While investor focus on Keytruda issues may cause some to overlook the broader potential, Merck’s enduring strengths remain intact. The company has a robust dividend history, with payouts increasing by 71% over the past decade. It currently offers a forward yield of 2.96%, surpassing the S&P 500’s average yield of 1.32%. Merck remains a dependable option for income-focused investors.
2. Medtronic
Medtronic, a leader in medical devices, boasts a remarkable dividend streak, having increased payouts for 47 consecutive years. This achievement reflects the company’s strong business foundation. Medtronic provides a wide range of products across various categories and operates in over 100 countries globally, offering promising long-term opportunities.
One growth area for Medtronic is its diabetes care segment, which has become a significant growth driver recently. Innovations in this field include the MiniMed 780G, the only insulin pump featuring meal-detection technology that automatically adjusts insulin levels based on patient needs. Given that diabetes affects half a billion adults worldwide, Medtronic is well-positioned to meet the demand for such products.
Additionally, Medtronic is developing a robotic-assisted surgery system called Hugo, which could serve as an important growth driver. Although Intuitive Surgical currently dominates this market, the world’s aging population and increasing demand on health systems underscore the importance of minimally invasive surgeries. These procedures tend to result in less scarring, bleeding, and shorter recovery times, making the Hugo system potentially valuable. The system is currently undergoing clinical trials in the U.S.
While Medtronic has faced recent revenue growth challenges, it is expected to recover over the long term. As it approaches becoming a Dividend King, Medtronic is likely to continue increasing its payouts for many years.
