3 Reasons Royalty Pharma Is a Dividend Stock You Never Have to Sell

Healthcare isn't optional, which makes the pharmaceutical sector fairly resilient through the entire economic cycle. Royalty Pharma (NASDAQ: RPRX) has created a diversified portfolio of royalties on drugs that are approved for sale and on drugs that are still in development. For buy-and-hold income investors, this unique healthcare stock could be the perfect way to invest in the pharmaceutical sector. Here's why.

What does Royalty Pharma do?

Pharmaceutical companies search for and develop drugs that they hope will one day generate large profits. However, the drug discovery process is complex, competitive, and costly. This is where Royalty Pharma comes in. Royalty Pharma provides drug companies with cash up front in exchange for the right to receive future royalties on approved drugs.

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The cash Royalty Pharma provides allows drug companies to continue their research efforts in a cost-effective manner. The cash that Royalty Pharma generates from its royalty portfolio funds the cash distributions it pays to shareholders. Royalty Pharma's yield is currently around 1.5%, slightly higher than the pharmaceutical sector's average of roughly 1.4%. Here are three big reasons why even the most conservative dividend investors should take a closer look at Royalty Pharma.

1. The big picture: healthcare is resilient

It is important to understand Royalty Pharma's role in the broader healthcare sector, as it provides the funding drug companies need to continue developing new drugs. However, it is equally important to remember the role of healthcare for end customers. The drugs that Royalty Pharma owns royalties on help people live better lives. In some cases, they may even be the difference between life and death. Healthcare spending simply isn't optional most of the time.

So, even in a recession, healthcare spending tends to remain strong. This makes Royalty Pharma the type of investment you can comfortably hold through the entire economic cycle.

2. Royalty Pharma is run by industry experts

There are any number of drug companies you could buy that would let you benefit from the resilient demand for healthcare. But which ones should you buy? That's actually a pretty difficult question to answer given the complexity and competition in the pharmaceutical sector. If you aren't an industry expert, you may not have the time or desire to do the legwork necessary to sort the wheat from the chaff.

Don't worry, you aren't alone. Investing is a lot of work in general, and even more work if you look at highly technical sectors. But Royalty Pharma has you covered since it employs industry experts to help it decide which drugs have the best prospects for success. Simply put, you don't need to be a pharma expert; you can just buy Royalty Pharma and let the company do all the hard work for you. And, notably, that means keeping up and adjusting to new developments in the sector so the company's royalty portfolio remains at the cutting edge.

3. Royalty Pharma's royalty portfolio is diversified

The hard work is deciding which drugs to invest in. But there's an interesting twist with Royalty Pharma because it doesn't just work with one company. And its business isn't totally reliant on just one drug, as are many smaller, and even some larger, drug companies.

Royalty Pharma's portfolio includes 35 approved products and 16 that are still in development. A full 16 of its drugs generate more than $1 billion in annual revenue, making them "blockbuster" drugs, with an average remaining royalty duration of around 13 years. Royalty Pharma gives you broad exposure to the drug sector with a single investment. If you believe diversification is important for your stock portfolio, then this inherently diversified, dividend-paying drug stock will be right up your alley.

Royalty Pharma checks a lot of boxes

Royalty Pharma isn't perfect. Just like any other pharma company, it will invest in drugs that don't work out as well as planned. However, when you step back, it provides investors with a reliable income stream in a highly resilient sector. And given the inherent complexity of the pharma sector, management's expertise and the diversification built into the business model make it an easy solution for investors who want drug exposure but aren't quite sure where to begin. If you aren't a drug industry expert, Royalty Pharma could be the one drug stock you buy and never have to sell.

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