How Dividends Change the Game for Owners of Pfizer Stock

The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Biopharma giant Pfizer (NYSE: PFE  ) just reported a disappointing first quarter. Pfizer share prices fell as much as 4.8% on a generally flat market day, making the stock the worst performer on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) today -- by a long shot. The company missed Wall Street's revenue and earnings targets as key products started falling out of patent protection

But Pfizer's stock still trades less than 6% below recently set all-time highs, and management boosted dividend payments by 9% last quarter. The shares offer a meaty 3.3% dividend yield, even at these skyrocketing prices. And that dividend muscle is what turns Pfizer's proven cash machine into a market-crushing investment vehicle.

PFE Dividend Chart

PFE Dividend data by YCharts.

Reinvesting Pfizer's dividends is a winning strategy. That way, you put some serious distance between dividend-adjusted returns and the Dow's gains. Pfizer even beats the total return of fellow Dow member Merck (NYSE: MRK  ) .

And here's why: Pfizer did slash dividend payouts in response to the 2008 and 2009 global economic crisis, but it has boosted its policy every year since then. Merck has provided just two dividend boosts in the last four years. All told, Pfizer's payouts have jumped 50% since the post-crisis rock bottom, while Merck's only gained 13%.

Not only that, but Pfizer's dividends still have more room to grow than Merck's. Both companies pocket a generous share of their free cash flows, but Pfizer uses a smaller portion of its cash for dividend payments. And unlike Merck's, Pfizer's cash funding never dried out, even at the height of that old crisis.

PFE Cash Div. Payout Ratio TTM Chart

PFE Cash Div. Payout Ratio TTM data by YCharts.

These are the details that make income investors sleep soundly at night with some Pfizer stock under their pillows. Don't let one disappointing quarter scare you away from this hulking generator and sharer of cash.

More on Merck
Merck stumbled into 2013 and continues to battle patent expirations and pipeline problems. Is Merck still a solid dividend play, or should investors be looking elsewhere? In a new premium research report on Merck, The Fool tackles all of the company's moving parts, its major market opportunities, and reasons both to buy and to sell. To find out more, click here to claim your copy today.



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  • Report this Comment On April 30, 2013, at 2:56 PM, Njja wrote:

    As a former owner of PFE stock when they cut the dividend several years ago I sold my position and never looked back. I currently maintain positions in several other drug companies which have done very well and maintain their dividends for their shareholders.

    Once a company cuts it's dividend you are wise to move your investment to a better run company.

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