2 Unstoppable S&P 500 Dividend Stocks to Buy Before They Beat the Market Again

Investors looking for stocks that can reliably outperform the broad market should take a look at the pharmaceutical industry. The tail wind that pushes them forward is strong. In the US, about 10,000 people become eligible for Medicare each week.

The US is one of many developed countries with an aging population that is increasingly dependent on prescription drugs. This is how AbbVie (ABBV -0.26%) and AstraZeneca (AZN 0.06%) have consistently exceeded the reference level S&P 500 index.

Data source: Yahoo! Finance. Table by author.

Whether you’re trying to build a passive income stream or outperform the overall market, these stocks have what it takes. Here’s how it could continue to outperform in the years to come.

1. AbbVie

AbbVie has increased its dividend payout by a staggering 270% over the past 10 years, but it doesn’t trade like a stock that quickly raises its quarterly payout. At recent prices, it offers a yield of 3.2%.

AbbVie’s shares have been under pressure as its former lead drug Humira lost patent-protected market exclusivity in the US in 2023. In the first half of 2024, sales of Humira fell 33% year over year to 5.1 billion dollars.

Declining Humira sales is a challenge, but AbbVie has done a pretty good job reinvesting the profits it has generated. In 2019, the company launched Skyrizi for psoriasis and Rinvoq for arthritis, and those two drugs alone make up for Humira’s losses.

The pair’s combined sales have reached $7.3 billion in the first half of 2024 and are far from done. In February, management told investors it expects Rinvoq and Skyrizi to generate more than $27 billion in combined annual sales by 2027.

Investors will be happy to know that Rinvoq and Skyrizi aren’t the only blockbuster drugs AbbVie has launched in recent years. For example, its oral migraine headache treatments, Ubrelvy and Qulipta, are expected to generate more than $3 billion in combined annual sales at their peak.

AbbVie’s stock has been trading for about 17.9 times the midpoint of management’s 2024 earnings expectations. That’s a historically high multiple for the company, but pressure from Humira’s competition is already starting to ease. With plenty of growth factors to push earnings higher, investors buying at recent prices stand a good chance of coming out ahead in the long run.

2. AstraZeneca

AstraZeneca is an international drugmaker that doesn’t get much attention from US investors. That’s because its dividend payouts are a bit unusual.

Instead of four equal quarterly distributions, AstraZeneca is pushing for two payments a year, with a larger portion announced alongside fourth-quarter results and payable in March. In July, the company raised its first interim distribution by 7.5% to $0.50 per American Depositary Receipt (ADR).

At recent prices, the stock offers a dividend yield of 1.9%. That’s not particularly tempting right now, but the distribution could grow at the same rate as the company’s bottom line. AstraZeneca generated $7 billion in free cash flow over the past year and needed just 64% of that amount to meet its dividend commitment.

AZN Dividend Data by YCharts.

AstraZeneca has several growth drivers that could boost profits and dividend payouts in the coming years. In the first half of 2024, sales of Farxiga — a treatment for diabetes, heart failure and chronic kidney disease — rose 35% year over year to $3.8 billion. Sales of Calquence, a blood cancer drug, rose 27% to $1.5 billion, and Ultomiris, a rare disease drug, rose 32% to $1.8 billion.

Free cash flow has been growing since 2020 and could continue to grow, thanks to a highly successful product line. In the first half of 2024, AstraZeneca reported sales that rose more than 10% year-on-year for 21 different drugs.

With plenty of growth factors to push revenue higher and a lack of significant patent cliffs to offset, AstraZeneca expects earnings to grow by a mid-teen percent this year. Adding stocks to a diversified portfolio now looks like a smart move.