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It's Not Too Late to Buy into This Powerful Uptrend

By Brett Eversole
Friday, July 13, 2012

Drug stocks have been on a tear this year.
 
Pharmaceutical giant Abbott Labs is up 18%. Smaller names like Questcor and Auxilium are up 38% and 35%, respectively.
 
The sector overall – as measured by the PowerShares Dynamic Pharmaceuticals fund (NYSE: PJP) – is up 19% so far in 2012... more than double the S&P 500's 9% return.
 
Most investors get scared when they hear about powerful moves like this. They're more likely to sell than buy because they assume the sector is expensive. But that isn't the case today... 
 
Now is not the time to sell. Big Pharma is one of the strongest uptrends around. These stocks are still cheap, and as a whole, the sector is paying close to its highest dividend ever.  
 
Now is the time to buy into the pharma uptrend. Let me explain... 
 
Big-name drug stocks are paying market-beating cash dividends.  
 
We've only seen dividend yields this high a few times in the past 30 years. Take a look... 
 
Pharma Stocks Soar When Dividends Are This High 
 
Excluding the 2009 crash, the last time we saw dividends this high was 1994. Back then, the peak in yields launched the pharmaceutical sector into a massive seven-year bull market. Pharma stocks increased more than 500% and reached an all-time high in 2000.
 
You see, 20 years ago, investors sought out cash-paying investments. As investors bought dividend-paying drug stocks, they drove the share prices up. The same trend is happening today.
 
Thanks to their high dividends in 1994, triple-digit gains were standard for big-name drug stocks. Back then, Johnson & Johnson paid out 2.9%, even less than today. That started an incredible run in J&J's stock. The company increased over 450% into its 2000 peak.
 
The same thing happened with Pfizer. In 1994, the company paid a 3.5% dividend... and rocketed 850%. Merck paid a 3.8% dividend... and rose 500%. And so on... 
 
Today, the pharmaceutical sector pays a 3.3% dividend yield... That's 50%-plus over the S&P 500's 2.1% yield. And some of the top names pay even larger yields... 
 
Company 
Ticker 
Dividend Yield 
Eli Lilly 
LLY 
4.60% 
Merck 
MRK 
4.00% 
Bristol-Myers Squibb 
BMY 
3.90% 
Pfizer  
PFE 
3.90% 
Johnson & Johnson 
JNJ 
3.60% 
 
These are incredible dividends in a world where 10-year Treasuries only pay 1.6%. And historically, many of these companies are at or near all-time-high dividend yields.
 
Of course, the "Johnson & Johnsons" of today are very different than they were in 1994. These drug companies will grow slower than they did 20 years ago. So we shouldn't expect thousands of percent returns.  
 
But right now, these companies are thriving. They're paying huge – and often growing – dividends to their shareholders. And based on dividends, drug stocks are a better deal today than they were nearly three decades ago.
 
With 10-year Treasuries paying less than 2%, drug companies pay nearly twice the cash income. That wasn't true in 1994, when interest rates were much higher than they are today. Investors didn't consider J&J's 3% dividend as "competitive" with the double-digit rates you could have earned by buying government bonds or even a CD! 
 
Right now, the dividend yields on these stocks – relative to other investments – is simply too high for cash-seeking investors to ignore. I expect their appetites for income will fuel the tailwind driving drugs stocks higher.  
 
If you don't already own pharma, consider some of the names listed above. Or you can easily buy a basket of these companies with the PowerShares Dynamic Pharmaceuticals Fund (NYSE: PJP).
 
Yes, these companies are up big in 2012. But now is not the time to sell. They're still cheap, and they still pay hefty dividends. We want to be onboard this long-term trend.
 
Good investing, 
 
Brett Eversole




Further Reading:

Last September, Doc Eifrig told readers that some of his favorite Big Pharma stocks, including Eli Lilly, were on sale. "They have a terrific tailwind at their back with the Baby Boomer generation growing older," he writes. "And right now, they're a great deal." The two names he highlighted are already up an average 23%. Read more here: Your Chance to Buy Dividend Machines on the Cheap.

Market Notes


ANOTHER "BASICS" LEADER IS BREAKING OUT

Today, we check in with a long-term strategy we've endorsed many times in DailyWealth... selling the basics.
 
Regular readers know that when it comes to investing in high-growth emerging markets like Brazil, India, and China, we're drawn to "the basics" approach of owning dominant global companies that sell things like soda, beer, and cigarettes to these markets. "Boring" products like these enjoy steady demand... And there's scant risk that a new technology will make having a beer after work obsolete. Plus, well-run companies in these industries generate huge cash flows and big dividends.
 
One top "basics" stock is Colgate-Palmolive (NYSE: CL). The company began selling toothpaste and soap during the 1800s. Starting with just a few small shops in the U.S., Colgate-Palmolive now sells its products to consumers in more than 200 countries.
 
As you can see from today's chart, "selling the basics" is working. Colgate-Palmolive has been in a "stair-step" uptrend over the past two years. Each step is a small gain... between 5% and 10% every few months. Over two years, these little "steps" higher have added up to a 40% gain, including dividends. Again, investing in the basics isn't exciting... it just works.
 
– Larsen Kusick
 
Colgate-Palmolive (CL) in a Two-Year Stair-Step Uptrend

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