3 High-Yield Healthcare Stocks to Buy Hand Over Fist in August

Key Points

• Merck is an industry giant that has proved time and again it can innovate for the future.

• Ventas has positioned itself to grow its business and its dividend.

• Omega Healthcare Investors has survived the storm, and now it is ready to ride the wave.

• 10 stocks we like better than Merck ›

If you are looking at healthcare stocks for dividend ideas in August, don't get too caught up on the sector's low 1.8% dividend yield. You can do much better than that without having to take on huge risks. Three solid options that you might want to buy hand over fist right now are Merck (NYSE: MRK), Ventas (NYSE: VTR), and Omega Healthcare Investors (NYSE: OHI). Here's a primer on each one.

1. Merck is a high-yield survivor

Merck's dividend yield is a pleasing 4.1% or so, more than twice the healthcare sector's average. The company has increased its payout annually for 15 consecutive years. From this standpoint, it is an attractive dividend stock, but what about the business?

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Merck is one of the world's largest pharmaceutical companies. Discovering new drugs is hard work, and it usually doesn't happen in a linear fashion. Right now, investors appear concerned that Merck's current patents will expire before it finds a new blockbuster to replace its older drugs. That's not unreasonable, since it is highly reliant on the revenue of just one drug right now (oncology treatment Keytruda).

But this isn't an unusual development; it is kind of normal for drug companies to go through periods like this. What's important to note is that Merck's strong research and development capabilities and its scale (it can fairly easily buy smaller companies to bolster its drug pipeline if it needs to) have allowed it to thrive over the long term. And that has allowed the dividend to trend reliably higher for decades, though it has not increased every single year.

If you can handle buying while others are selling, Merck looks like an attractive choice right now. Its yield is near the highest levels since the Great Recession.

Image source: Getty Images.

2. Ventas cut its dividend, but now it's set to grow

Ventas is a real estate investment trust (REIT) specializing in senior housing, with a dividend yield of 2.8%. That's not bad, but it's not exactly an earth-shattering figure. And on top of that, the REIT cut its dividend during the pandemic.

It was the right move, given that senior housing facilities were particularly hard hit during that time. And the dividend cut allowed Ventas to work with its tenants and shift its business approach in a more growth-focused direction.

Specifically, Ventas increased its exposure to properties that it both owns and operates (technically, it hires a property manager). This allows the revenue and costs to flow directly onto the income statement.

When times are tough, like during the pandemic, that's bad news. When times are flush, however, these assets can supercharge earnings. Senior housing has come back strongly from the pandemic hit. And the aging demographics of the country suggest there's more growth to come.

The big story, however, is that dividend increases have resumed. And given the growth-focused nature of the business right now -- adjusted funds from operations rose a heady 9% year over year in the second quarter -- it is reasonable to expect dividend raises to be quite attractive in the years ahead.

3. Omega Healthcare Investors is still out of favor

Omega Healthcare's dividend yield is a lofty 6.7%. The payout hasn't been increased in years, but it also hasn't been cut. Like Ventas, Omega is a REIT that owns senior housing properties, and they were hard hit during the pandemic.

Omega chose to hold the line on its dividend as it worked with its tenants. The portfolio repositioning has been difficult, but now that the world has mostly moved past the pandemic, things are starting to improve.

Adjusted FFO rose around 8% in the second quarter. That strong showing isn't quite as big an opportunity on the dividend front here, however, because its payout remained high throughout the pandemic period. But it is a sign that Omega's payout is likely sustainable as it gets back on the growth track, including buying new properties.

Ventas' exposure to senior housing and the graying of the country are growth engines. Omega's exposure to this same thing is a recovery engine. If you need income today, buying into its turnaround story will probably be more attractive to you than buying Ventas.

Three solid dividend choices in the healthcare sector

Even when the average healthcare stock has a miserly 1.8% yield, you can still find very attractive income options. Merck is a tried-and-true dividend payer with a well-run business and attractive yield.

Ventas, which also has an attractive yield, repositioned itself for growth during the pandemic, and that is now starting to shine through on the dividend side of things.

And Omega muddled through the pandemic without a dividend cut, leaving it with a high yield today and a strengthening business. August could be a great time to buy one or more of these healthcare dividend stocks.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool has a disclosure policy.