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Here’s Why Income Investors Should Consider Buying This High-Yield Dividend Stock

With U.S. gross domestic product declining for the second consecutive quarter, the economic outlook is growing more negative. But for investors who have been buying quality dividend stocks, the currently gloomy economic environment should prove to be nothing but a minor bump in the road. 

Swiss drugmaker Novartis (NYSE: NVS) boasts a $207 billion market capitalization, which makes it the sixth-largest pharma stock in the world and the largest international-based pharma stock. Here are a few reasons income investors should consider adding this stock to their portfolios. 

A deep product portfolio and even deeper drug pipeline

Novartis had a decent second quarter for the period ended June 30. The company reported $12.8 billion in net sales in the second quarter, which was a 1.4% decline over the year-ago period. 

Factoring out the unfavorable foreign currency translations that resulted from a strong dollar, Novartis’ net sales actually grew 5% during the quarter. What contributed to another quarter of constant currency net sales growth for the company? 

Out of the dozens of products in Novartis’ portfolio, 13 posted the equivalent of $1 billion or more in annualized sales in the second quarter. And nine of those 13 blockbuster products generated low-double-digit to mid-double-digit net sales growth for the company in the quarter. 

As has been the case for a while now, the immunology drug Cosentyx and the heart failure drug Entresto led Novartis’ net sales higher. Cosentyx’s net sales increased 8.5% year-over-year to $1.3 billion in the second quarter due to growing demand in the U.S. and Europe, as well as accelerated growth in China. Entresto’s net sales surged 27% higher over the year-ago period to $1.3 billion for the quarter. This was driven by a combination of more demand and higher market share for the drug. 

Novartis’ non-GAAP (core) earnings per share (EPS) fell 6% year over year to $1.56 for the second quarter. Adjusting for unfavorable foreign currency translations, the company’s EPS was actually up 1% over the year-ago period. 

And due to the company’s pipeline of 150 projects under development, the company’s future revenue and earnings should steadily grow. In fact, analysts are forecasting 4.2% annual earnings growth over the next five years. 

Image source: Getty Images.

The generous dividend is viable

Novartis offers a 3.9% dividend yield to income investors. For context, this is more than double the S&P 500 index’s 1.6% yield. And the dividend appears to be rather safe for two reasons. 

The company’s dividend payout ratio for the next 12 months is projected to be 49.7%. This allows the company to retain half of its earnings for bolt-on acquisitions, share buybacks, and debt reduction. It also gives Novartis a huge buffer to continue paying its dividend if earnings were to decline for a short period. 

A fairly valued stock

Novartis’ fundamentals look to be stable. And the valuation is arguably sensible as well.

Novartis’ forward price-to-earnings (P/E) ratio of 13 is moderately higher than the industry average forward P/E ratio of 11. But this seems to be justified given that the company has one of the most appealing product portfolio and pipeline pairings among its industry peers. Better yet, Novartis’ 3.9% dividend yield is slightly higher than its 10-year median dividend yield of 3.8%. These indicators suggest that the stock could be a buy for investors seeking passive income

Kody Kester has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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