Pfizer (NYSE: PFE) is one of the largest and most respected pharmaceutical companies in the world. This is important context for dividend investors to consider when considering the stock’s generous 6.4% dividend yield. For reference, the average yield on pharmaceutical stocks is just 1.7%. Beyond production, there’s another reason to buy Pfizer.
If you buy Pfizer and earn its 6.4% dividend yield, you’ve achieved roughly two-thirds of the 10% return that most investors expect from the stock over time. If you reinvest your dividends, you’re essentially buying more shares if they’re unpopular. If the stock rebounds, you will use leverage to move higher.
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That is, the yield is not only high on an absolute basis; Its stock price is also high relative to other drug stocks. Therefore, purchasing Pfizer as part of your healthcare allocation can help increase the income generated by your portfolio. The problem, of course, is the risk of not being able to support high dividend payments.
Pfizer is ramping up production because its important drugs are about to lose patent protection. This will result in lower revenue for these drugs. At the same time, the company has encountered significant setbacks in its efforts to develop new drugs, including having to abandon its internally developed GLP-1 weight loss drug.
These are not actually unusual events in the pharmaceutical industry. Pfizer has been through tough times like this before. The company is quickly addressing the issues it faces, acquiring a company with an attractive GLP-1 drug candidate and working with another company on a distribution deal. Pfizer doesn’t just want the best results; It is taking the necessary steps to ensure that better times are coming.
Currently, Pfizer’s dividend payout ratio is over 100%. This suggests that dividends come with a certain amount of risk, which is true. However, dividends are paid out of cash flow rather than earnings, so the payout ratio can rise above 100% for some time without triggering a dividend cut. And Pfizer recently said it intends to support its current dividend.
Given Pfizer’s long and successful history, it seems more aggressive dividend investors have reason to trust management. This is true both for the business’s turnaround and the company’s ability to support the dividend until results improve.
