The following is an excerpt from an article published at Seeking Alpha. You may view the entire article by clicking here.
Investors should consider healthcare stock classifications as a very diverse equity market. A mutual fund classified as “healthcare,” for example, can cover a wide range of businesses such as provider groups, pharmaceutical companies, health insurance companies, healthcare technology, and biotechnology. With the plethora of investment choices, income-oriented investors have numerous options when it comes to buying healthcare stocks that pay dividends. However, healthcare investors seeking a reliable and mostly predictable cash distribution should focus on the pharmaceutical sector.
In an environment where income-oriented investors have few investment options without acquiring risk, healthcare provides an opportunity for equities with reliable, years-long track records of generating income through dividends. Of all the sub-sectors in healthcare, better opportunities for dividends, especially for short-term investors, lie with pharmaceutical companies. Unlike the healthcare systems, pharmaceutical manufacturers are for-profit corporations. Pharmaceutical companies derive their profit from the creation of innovative drugs and drug therapies. Assuming the drug is granted a 20-year patent, the Food and Drug Administration (FDA) tests the drugs over a period of years. The pharmaceutical company can then utilize the remaining time on the patent to earn profits as the exclusive provider of that drug. Once the patent expires, competitors can sell generic versions of the drug, and profits usually fall. Many of these serve as a source of consistent profitability that can greatly enhance dividend income.
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