Finding a good dividend stock isn't as simple as just looking for the highest yields. There are stocks that pay 10% or more, but those payouts may not necessarily be sustainable over a long period. A safer approach is to find a good balance of a high yield without too much risk. And with the stock market still scorching hot and at record levels, that has pushed yields down; the average S&P 500 stock pays just 1.3%.
Two investments that can generate more than double that recurring income are Gilead Sciences (NASDAQ: GILD) and Kraft Heinz (NASDAQ: KHC). Their payouts currently stand at more than 3% and offer investors a great mix of stability and recurring income.
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1. Gilead Sciences
Gilead Sciences currently pays investors a yield of 3.9%. If you were to invest $25,000 into the stock, that means you could be collecting nearly $1,000 over the next 12 months just in dividend income. That's nearly three times the $325 in dividends you could earn from the average S&P 500 stock.
What's more, Gilead has also raised its payouts over the years, meaning you can earn more on your initial investment over time. Five years ago, the healthcare company was paying a quarterly dividend of $0.47 and today it is $0.71, a rise of more than 50%. Meanwhile, Gilead's current payout ratio is less than 50%, suggesting there is room for more rate hikes in the future.
Importantly, the business is doing well. For the period ended Sept. 30, 2021, sales grew 13% year over year to $7.4 billion, helped in part by the $1.9 billion it generated from Veklury, its COVID-19 treatment for hospitalized patients.
Gilead is also well-known for its HIV drug, Biktarvy, which continues to dominate its category with a 41% market share in the U.S. With new competition from generics, its sales fell by 8% during the latest period, which may concern some investors. However, the company notes that HIV-related revenue was up 4% year over year when excluding the impact of losses in exclusivity.
The company also has a promising treatment in lenacapavir, which if the U.S. Food and Drug Administration approves it this year, would be "the first available six-month long-acting subcutaneous injection treatment for HIV."
What makes this a solid, income-generating investment is Gilead's impressive gross profit margin, which has stood no lower than 78% of revenue over the past five years. That, in turn, has helped the company consistently post a profit. And the company continues to work on keeping costs down. On its most recentearnings call Gilead said it plans to open a facility in Maryland later this year which will automate many processes.
The present looks solid for Gilead Sciences, and the future is even more promising. For healthcare investors, this is a top dividend stock to buy today.
2. Kraft Heinz
Kraft Heinz pays an even higher dividend yield of 4.5%. A $25,000 investment here could generate more than $1,100 in annual dividend income for your portfolio. Kraft, however, hasn't been raising its payouts and actually slashed its dividend in 2019 -- from $0.625 to $0.40 per quarter. But by doing so, the dividend is much more sustainable. Over the past 12 months, Kraft's free cash of $3.2 billion has provided ample room for the $2 billion the company has distributed in dividends.
Although Kraft's 35% gross margin isn't as high as Gilead's, that hasn't stopped it from posting strong operating results. With just modest overhead (selling, general, and administrative costs, etc.) amounting to less than 15% of sales, the company is able to consistently bank about one-fifth of sales as operating profit.
Sales growth has been a challenge of late. For the most recent quarter (ended Sept. 25, 2021), net sales totaled $6.3 billion, down a bit less than 2% from the prior-year period. And on a year-to-date basis, the company's top line has been flat from the previous year. There are also challenges ahead, especially with supply-chain issues and inflationary pressures chipping away at margins.
Yet, Kraft may be one of the safer stocks out there with respect to those challenges. Its popular food items are staples in restaurants and pantries across the country. And on the company's latest earnings call, Global Chief Financial Officer Paulo Luiz Araujo Basilio noted that Kraft has "confidence in our ability to price the short-term inflation that we are seeing."
Whether you want a top dividend or just a stable stock to own in 2022, Kraft Heinz could be a great choice.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Gilead Sciences. 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.
