So far this year, the Nasdaq Composite has turned in a solid performance, up by about 12%. And the Nasdaq-100 — an index that tracks the 100 largest non-financial companies on the Nasdaq — has done even better, rising by 13.5%.
Not included in these returns are the contributions of dividends. But it’s notable that the top three dividend payers in the Nasdaq-100 index currently deliver fairly sizable yields of between 4.6% and 6.5%. Hunting for big dividends? These three could be for you.
This healthcare stock hasn’t been so cheap in years
First up is Walgreens Boots Alliance (NASDAQ: WBA). Shares of the pharmacy chain haven’t been this cheap in a long time. Over the past five years, the company has lost nearly 70% of its market capitalization. Management slashed the dividend in half last November, but due to its struggling stock price, its yield is now around 6.5%.
What’s going on here? As Fool contributor Geoffrey Seiler recently explained, Walgreens and other pharmacies are facing reimbursement pressures. Most of the money they earn comes through reimbursements from pharmacy benefit management companies (PBMs) — the entities that negotiate drug prices for health insurance customers.
The issue is that the PBM market is now highly consolidated. Just three PBMs control about 80% of the market. They’ve used their market power to push down reimbursement rates, directly impacting Walgreens’ bottom line.
Walgreens has tried to diversify its business model by expanding its non-pharmacy sales and acquiring stakes in other businesses like Village MD, a primary care provider. But none of this steps have stemmed the tide of declining profitability in its core business.
Could a turnaround be around the corner? Eventually, the business should stabilize. As Seiler asserts, “When it comes to reimbursement, ultimately there is only so much blood from a stone that PBMs can squeeze out of pharmacies.” But it will take several years for this story to play out.
The stock trades at just 5 times forward earnings, however. If you’re willing to wait through the turmoil, there could be plenty of upside once the market concludes that WBA’s downward spiral is over. But don’t invest in this company just for the dividend. The payouts could be cut again if conditions don’t improve soon.
These 2 stocks are better bets for dividend investors
While Walgreens isn’t a great fit for investors who are primarily focused on dividend income, the Nasdaq-100’s other two highest-yielding stocks are. The first is Kraft Heinz (NASDAQ: KHC), the maker of popular packaged goods, such as Heinz ketchup, Kraft macaroni and cheese, and hundreds of other well-known products.
The stock lost 70% of its value from 2017 to 2020 as its branded products faced increased competition and pricing pressure from new market entrants. The recent period of higher-than-normal inflation has also kept a lid on its stock price given that consumers are more willing to switch to lower-priced alternatives to their preferred brands.
Due to these headwinds, the share price has only gained around 20% in value over the past five years — a period during which the Nasdaq Composite is up by more than 120%. When adding in its dividends, however, the picture for Kraft Heinz becomes brighter.
Since 2019, the company has paid a consistent quarterly dividend of $0.40 per share. At the current share price, that gives it a 4.6% yield — not bad for an iconic company with steady sales and a global presence. This stock probably won’t be a noteworthy grower, but management shouldn’t have any issue maintaining its dividend given the payout absorbs less than 70% of its current earnings.
The final stock on this list is biotech giant Gilead Sciences (NASDAQ: GILD). Its shares, too, have struggled this year, losing nearly one-fourth of their value. That decline has pushed their dividend yield up to 4.9%, and the dividend was increased from $0.75 per share to $0.77 per share only a few quarters ago.
Is this an opportunity to lock in a sizable dividend produced by a highly profitable, growing business? That could very well be the case although there is some risk to this investment.
Gilead has a promising portfolio of next-generation medications for conditions like HIV, breast cancer, and B-cell lymphoma. While its existing drug portfolio is doing quite well — generating $6.7 billion in sales last quarter, up 5% year over year — drug companies often go through periodic ups and downs given uncertainty regarding their pipelines of potential new products.
For instance, two of Gilead’s candidate drugs — sacituzumab govitecan and magrolimab — recently delivered weak clinical trial results that tanked the stock.
Yet, Gilead is highly diversified and its R&D team is taking many shots on goal. Its currently marketed drugs, meanwhile, deliver plenty of cash flow for funding the development of new candidates. Investors can expect a bumpy ride for the stock price, but they can also feel comfortable with a dividend that management has steadily boosted since 2015. If you’re looking for a high dividend yield with long-term upside potential, Gilead is a great contrarian pick.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Gilead Sciences. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
Should You Buy the 3 Highest-Yielding Dividend Stocks in the Nasdaq-100? was originally published by The Motley Fool
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