How Much Would You Need to Invest in These 5 Pharma Stocks to Earn $1,000 a Month in Dividends? | The Motley Fool
Dividend investors often focus first on yield, which can lead to an overly aggressive portfolio. For example, in the pharmaceutical sector, Pfizer (PFE +1.65%) has a very attractive 6.1% yield, as of this writing. A roughly $200,000 investment in the stock would let you generate a bit over $12,000 per year in dividends, or, if you budget the quarterly payments well, $1,000 per month in income.
But there’s a big risk in putting all of your eggs in one basket. Pfizer has a number of drugs facing patent expiration, and its research and development efforts haven’t yet produced new drugs to replace the income they generate. Moreover, while its cash flow covers its dividend, earnings do not. Which is why you’d probably be better off investing roughly $70,000 each in Pfizer, Johnson & Johnson (JNJ +1.93%), AbbVie (ABBV +1.49%), Bristol Myers Squibb (BMY -0.77%), and Amgen (AMGN +1.82%). Here’s a look at each one.
Image source: Getty Images.
Diversification matters when building a dividend portfolio
At this point, Pfizer is standing behind its dividend. However, the yield is likely 6.1% because investors worry the dividend will be cut. Putting all of your eggs in one basket leaves you exposed to the risk of such a cut if you focus on the highest-yielding stocks. To put a finer point on it, if you were counting on the $12,000 per year of income from an investment in Pfizer, a 50% dividend cut would leave you with just $6,000. Building a diversified portfolio is an easy way to reduce the risk of a dividend cut.
One of the easiest ways to do that is to simply invest an equal dollar amount in each stock you are considering. In this case, you would need to invest roughly $70,000 each in the five pharmaceutical companies noted above (or $350,000 total). That would lead to an annual income stream of $4,270 from Pfizer, $1,400 from J&J (2% yield), $1,750 from AbbVie (2.5% yield), $2,940 from Bristol Myers Squibb (4.2% yield), and $1,680 from Amgen (2.4% yield). The grand total would be $12,040 per year in income.
Today’s Change
(1.65%) $0.46
Current Price
$28.28
Key Data Points
Market Cap
Day’s Range
$27.59 – $28.29
52wk Range
$23.62 – $29.21
Volume
23.2M
Avg Vol
36M
Gross Margin
64.83%
Dividend Yield
6.08%
Each of these drug makers pays a quarterly dividend, so you’d have to collect the dividends and parse out $1,000 per month. However, if you can do that simple budgeting, you’d greatly diversify your risk with this portfolio. Of course, Pfizer is still doing a lot of heavy lifting on the dividend front, but if it cut its dividend in half, your income would only decline by $2,135. That’s a lot better than $6k.
Every stock comes with risk
The healthcare sector is highly competitive, and drug makers all face the risk of patent expiration. For example, Bristol Myers Squibb is set to lose patent protection on Opdivo and Eliquis (which is marketed with Pfizer) in 2028. Although the company has a strong drug pipeline, it still has to get those new drugs to market.
Today’s Change
(-0.77%) $-0.46
Current Price
$59.12
Key Data Points
Market Cap
Day’s Range
$58.74 – $59.79
52wk Range
$42.52 – $68.64
Volume
9.3M
Avg Vol
11.3M
Gross Margin
66.64%
Dividend Yield
4.26%
Johnson & Johnson, meanwhile, offers an interesting benefit because it also has a sizable medical devices business. That adds to the company’s diversification and the safety of the dividend you collect, highlighted by the fact that J&J has increased its dividend annually for over 50 years, making it a Dividend King.
AbbVie is also a Dividend King, though it inherited part of that history from its former parent Abbott Labs (ABT +1.13%). AbbVie is also a bit unique in that it sells Botox. While Botox is used for medical conditions such as migraines, it is primarily used for cosmetic purposes, where the brand name has material value. Patent-expiration risk is somewhat muted, though AbbVie still has to develop its pipeline.
Today’s Change
(1.82%) $7.43
Current Price
$414.87
Key Data Points
Market Cap
Day’s Range
$404.05 – $417.78
52wk Range
$288.00 – $447.03
Volume
2.6M
Avg Vol
2.7M
Gross Margin
72.71%
Dividend Yield
2.40%
Amgen, meanwhile, is technically a biotech company. While similar to a pharmaceutical, a biotech company uses living cells to create new drugs and benefits from a longer period of patent protection. Including Amgen in the mix further softens the patent-expiration risk for the entire portfolio. That said, the company’s Otezla is likely to see generic competition in 2028, while Repatha could see biosimilar competition in 2030. But Tezspire and Uplizna, both immunology drugs, and Evenity, which treats osteoporosis, are providing offsets. And the company is working on its production capabilities to improve margins.
Diversification has a cost, but it also has a huge benefit
The clear benefit of spreading your eggs across more baskets is that you reduce risk. And for a dividend investor trying to live off the income from a portfolio, that risk can’t be overlooked. Sure, you need to go from $200k invested in just Pfizer to $350k invested across Amgen, Pfizer, J&J, AbbVie, and Bristol Myers Squibb to produce the same $12,000 in yearly income. But buying only the stock with the highest yield likely isn’t going to be worth the risk for most investors.
