Although healthcare stocks aren’t known for their dividend-earning potential, they account for one of the largest components of the S&P 500 Index. Understanding the sector’s composition and historical performance is important for investors looking to gain exposure to pharmaceuticals, biotechnology companies and healthcare providers.
In the following article, we will provide a high-level overview of the healthcare sector, its composition and dividend-earning potential.
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Composition of the Healthcare Sector
The S&P 500 Index tracks 11 primary sectors, with healthcare being one. As of July 19, 2019, the sector had a total market capitalization of $5.5 trillion. Only information technology ($8.6 trillion) and financials ($7.2 trillion) were valued more.
Healthcare is further broken down into six industries, including:
- Healthcare equipment and supplies
- Healthcare providers and services
- Healthcare technology
- Life sciences tools and services
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For the benefit of income investors, Dividend.com provides a more granular breakdown of healthcare stocks. Dividend.com tracks 231 healthcare companies across 16 industries. With the exception of drug delivery and drug manufacturing companies, healthcare stocks are not known as being strong dividend plays.
|Industry||Company Count||Industry Dividend Yield|
|Drug Manufacturers - Major||22||1.98%|
|Medical Laboratories & Research||11||1.08%|
|Specialized Health Services||11||0.49%|
|Drug Related Products||4||0.41%|
|Drug Manufacturers - Other||12||0.40%|
|Long-Term Care Facilities||7||0.40%|
|Health Care Plans||9||0.39%|
|Medical Instruments & Supplies||30||0.37%|
|Home Health Care||1||0.32%|
|Medical Appliances & Equipment||39||0.28%|
|Drugs - Generic||8||0.15%|
Taken as a whole, healthcare is the lowest-yielding sector at just 0.55%. Technology, the second-lowest dividend-yielding sector, generates an average yield of 1.01%. Financials stocks, which boast the highest dividend yield, generate 3.05% on average.
Historically, healthcare dividends have underperformed the S&P 500 Index by a wide margin. As of July 19, 2019, the index’s average yield was 1.88%. The lowest the S&P 500 has ever yielded was 1.11% in August 2000.
Although healthcare isn’t considered ideal for dividend-focused portfolios, pharmaceuticals and well-established healthcare providers do provide attractive returns. UnitedHealth Group (UNH), Amgen (AMGN), CVS Health Corporation (CVS) and AbbVie (ABBV) all have attractive yields that pay well above the sector average.
Healthcare stocks consistently outperform the broader market during late-business cycles and even recessions. It’s not difficult to see why. Unlike consumer discretionary stocks, which are highly cyclical and largely dependent on disposable income, demand for healthcare doesn’t go down because of the economy. If anything, demand for healthcare is rising as Baby Boomers reach retirement in record numbers.
For these reasons, healthcare investments are a good hedge against inflation provided you are not investing in early-stage companies. Industries like biotechnology provide higher growth potential, but this comes at the expense of stability. A quick look at the Nasdaq Biotechnology Index gives you a good idea of just how volatile this cross-section can be.
Against this backdrop, we can conclude that investing in healthcare stocks has the following advantages:
- The sector outperforms the broader market during cyclical downturns.
- An aging population guarantees future demand, in turn ensuring the stability of the overall sector.
- A number of technological advances have made healthcare provision better than ever before.
The disadvantages of the sector include:
- It has weaker-than-average dividends.
- There is increased government scrutiny of drug prices.
- There is a growing number of Americans without health insurance, which prohibits access to healthcare products and services.
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The Bottom Line
Healthcare stocks are a core component of the S&P 500 Index. While they may not offer the same dividend potential as financials or basic materials, they are an indispensable part of a well-balanced portfolio. Remember that when trying to invest in the future.
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