Billionaires are loading up on this high-yielding dividend stock. Should I?

Dividend stocks aren’t just for those looking to create a passive income stream. Billionaire investors who no longer need the income to retire comfortably regularly invest in dividend-paying businesses because they tend to outlive their non-dividend-paying cousins ​​over time.

Non-dividend paying stocks in S&P 500 the index produced an average annual return of just 4.27% over the 50 years between 1973 and 2023. Dividend payers in the same benchmark outperformed by more than twice that, delivering an average annual return of 9.17 %.

In the second quarter, hedge funds managed by billionaire investors Israel Englander and Igor Tulchinsky bought shares of AbbVie (ABBV -0.59%)a dividend-paying pharmaceutical giant with both hands. Englander’s Millennium Management Fund boosted its AbbVie holdings by 682% by purchasing approximately 854,846 shares. Tulchinsky’s Worldquant Millennium Advisors bought 229,419 shares to open a new position.

With net worths exceeding $1 billion, Tulchinsky and Englander don’t need to take the same precautions as everyday investors. Let’s weigh some reasons to buy AbbVie against its risks to see if following these billionaires is a smart move for your portfolio.

Reasons to buy AbbVie stock now

AbbVie is a leading pharmaceutical company that markets several increasingly popular drugs with successful sales. For example, Skyrizi is an injection for the treatment of psoriasis, Crohn’s disease and ulcerative colitis that was launched in 2019.

Second-quarter Skyrizi sales rose 45% year-over-year to an annualized $10.9 billion, and the main U.S. patent protecting Skyrizi’s market exclusivity doesn’t expire until 2033.

AbbVie also has a huge upside in Rinvoq. This is an arthritis treatment tablet that was launched in 2019 and is already generating $5.7 billion in annual sales. Qulipta is a pill that the Food and Drug Administration (FDA) approved last year to prevent chronic migraines. Second-quarter sales of the headache-prevention treatment rose to an annualized $600 million in the second quarter and could top $2 billion in a few years.

AbbVie has increased its dividend payout at an astonishingly fast average annual rate of 13.1% since the split from Abbott Laboratories in 2013. At recent prices, the stock is yielding 3.2%. With still-young blockbusters like Skyrizi, Rinvoq and Qulipta growing profits, the return you get on your initial investment could go a long way by the time you’re ready to retire.

Reasons to remain cautious

AbbVie has raised its dividend payout quickly in the past, but investors expecting big payout increases over the next few years may be disappointed. In the first half of 2024, AbbVie reported total sales that rose just 2.6% year over year.

Bottom line, AbbVie expects adjusted earnings to come in between $10.67 and $10.87 per share this year. The midpoint of this range implies a 3% year-over-year decline.

AbbVie’s former flagship product, Humira, generated $14.4 billion in revenue for the company’s top line last year. Those sales fell to an annualized $11.3 billion in the second quarter of this year as they compete with new, lower-cost biosimilar versions that hit the U.S. market in 2023.

Humira isn’t the only major blockbuster in AbbVie’s lineup losing ground to the competition. Imbruvica is a blood cancer drug with second-quarter sales that fell 8% year-over-year to an annualized value of $3.3 billion. Imbruvica still has patent-protected exclusivity, but is losing ground to Brukinsa, a next-generation drug from BeiGene which work on similar lines.

A buy now?

At recent prices, you can buy AbbVie for about 17.9 times the midpoint of management’s estimated earnings for 2024. That’s a fair valuation if you expect it to repeat its recent performance for a few more years.

AbbVie looks like a great stock to buy now, as the biggest losses for Humira and Imbruvica are already in AbbVie’s rearview mirror. Without these headwinds, a return to rapid growth, which the market does not anticipate, could be near.

With Skyrizi and Rinvoq leading the way, AbbVie’s bottom line and dividend payout could start to grow rapidly again in a year or two. Buying stocks now and holding for the long term seems like a very smart move for the average investor.