By Al Root

Slower inflation, lower bond yields, and economic upheaval make playing defense a defensible investment strategy for the year ahead -- and there may be no better place to start building a healthy dividend portfolio than the healthcare sector.

In 2024, playing defense meant owning the Magnificent Seven, which gained an average 60%. Not this year -- the group is down an average 24% from their respective 52-week highs. Dividend stocks, however, are holding up just fine -- the SPDR S&P Dividend exchange-traded fund (ticker: SDY) has returned 2.5% so far this year -- and healthcare stocks are doing even better: The Health Care Select Sector SPDR ETF $(XLV)$ has returned 6.2%.

That outperformance makes complete sense. Dividend-paying stocks are a traditional defensive play, while healthcare faces fewer trade and economic headwinds than most sectors. Combined, they've done even better. S&P 500 healthcare stocks with the highest yields have returned almost 10% year to date, while those that pay relatively meager dividends have lost investors about 3% on average. The stocks without quarterly payouts have lost about 4% year to date. In other words, they're two great tastes that go great together.

There's also a fundamental case to be made for healthcare stocks, lest you worry they'll underperform once the market gets its mojo back. Medical-device makers are seeing improved growth "underpinned by demographic tailwinds, with baby boomers aging in the silver tsunami," writes Jefferies analyst Matthew Taylor. Hospital pricing and utilization trends look steady, too, according to Mizuho analyst Ann Hynes. Even pharmaceutical companies are expected to do well, with those in the S&P 500 posting sales growth of almost 10% in the fourth quarter, dramatically better than a year ago.

Where to start? CVS Health, Merck, AbbVie, and Gilead Sciences look particularly attractive. Almost 70% of analysts covering the stocks rate them Buy, above the 55% average for all companies in the S&P 500. Wall Street expects the quartet to grow earnings in 2025 by 20% on average. Their balance sheet leverage looks reasonable, and their dividend payouts have amounted to a safe 60% of income earned over the past 12 months.

The four stocks also look cheap. They trade for about 13 times estimated 2025 earnings, below the S&P 500's 21 times multiple, and yield about 3.3% on average, compared with 2.3% for the average healthcare stocks in the Russell 1000 index that pay dividends.

Investors comfortable with lower yields could consider insurer UnitedHealth Group, medical-device companies Abbott Laboratories and Stryker, technology provider Becton Dickinson, and distributor Cardinal Health. They yield an average of 1.6% and have paid out less than 50% of income as dividends over the past 12 months. Their balance sheets also look strong and they are expected to grow earnings by 9% on average, driven by industry tailwinds. Wall Street likes them too. More than 80% of analysts covering the shares rate them Buy. They trade for about 20 times estimated 2025 earnings on average, a little less expensive than the broader market.

Investors preferring to avoid the work associated with evaluating and managing individual stocks can always look to ETFs to adjust sector exposure. There are some differences to note. The Health Care Select Sector SPDR yields about 1.7%, better than the 1.3% yield for iShares U.S. Healthcare $(IYH)$ and the 1.4% yield for Vanguard Health Care $(VHT.AU)$.

No matter how investors decide to play them, dividend-paying healthcare stocks could be the perfect prescription for market volatility.

Write to Al Root at allen.root@dowjones.com

To subscribe to Barron's, visit http://www.barrons.com/subscribe

(END) Dow Jones Newswires

March 14, 2025 21:30 ET (01:30 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.