Should Investors Expect More Yield From Pharma Stocks?

Pharma is already one of the highest yielding sectors.

Healthcare cost
Lilli Day | Photodisc | Getty Images
Healthcare cost

On average, large cap pharmaceutical firms yield roughly 4 percent, which is 2 percent higher than stocks in the S&P 500 .

For WisdomTree Large Cap Dividend Index , on an aggregate basis, pharma represents the second biggest contributor of any industry, around $26 billion, according to Jeremy Schwartz, Director of Research at WisdomTree Asset Management.

Thanks to several rounds of cost cutting and new product launches, cash balances across the pharma sector are increasing — because of this JPMorgan analyst Chris Schott says we should see more cash being returned to shareholders via dividend.

The big question of course: Which firm is most likely to make a boost to their dividend?

Schott of JP Morgan is betting on Pfizer to increase its dividend 10 percent by December. Pfizer in the last 5 years has increased its dividend three times — 10, 11, and 12.5 percent.

In addition, JPMorgan is expecting Merck to make a 5 percent dividend boost by year-end. It estimates Merck will generate roughly $45 billion, or 40 percent of its current market cap, in post-dividend free cash flow through 2017, and anticipates much of this capital to be returned to shareholders over time.

Share buyback activity is also projected to increase. In 2011 share repurchase activity across the sector reached its highest level in four years, representing 2-3 percent of the pharma sector's market cap.

Bottom line: Cost cutting, stronger pipelines and new drug launches in place could mean more cash for drug firms, and potentially more cash returned to shareholders.

—By CNBC's Seema Mody

Questions? Comments? Email us at marketinsider@cnbc.com

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