What makes a great dividend stock? Most investors would put a high yield at the top of the list of criteria. Another important quality of a great dividend stock, though, is strong free cash flow. Companies that don't generate cash won't be able to keep those dividend checks flowing for long.

Three stocks that have both high yields and strong free cash flow are AT&T (NYSE:T), Gilead Sciences (NASDAQ:GILD), and Pfizer (NYSE:PFE). Here's how these dividend stocks are practically minting money.

Money falls out of the sky onto a pile of cash.

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AT&T belongs to the exclusive club of stocks called Dividend Aristocrats. The telecommunications giant has increased its dividend for 32 consecutive years, and its yield now stands at 5.32%, a level that would catch the eye of most income-seeking investors. Over the past 12 months, AT&T has generated free cash flow of $16.9 billion. 

This huge amount of cash flow comes primarily through four business segments: business solutions, entertainment, consumer mobility, and international. The business-solutions segment, which provides phone, wireless, and broadband internet products to businesses, generates the most cash for the company. AT&T's entertainment group, which includes the DIRECTV digital TV service, is the company's No. 2 source for revenue and profit. Together, these two segments account for three-quarters of AT&T's total revenue.

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There are two primary challenges for AT&T in the coming years. First, the company's traditional phone business is plunging as customers switch to wireless and internet-based services. Second, many customers are "cord cutting" -- ditching cable and satellite pay-TV for streaming and other alternatives. However, AT&T's move into content with its pending acquisition of Time Warner should help it in adapting to the changing landscape -- and keep the dividends flowing.

Gilead Sciences

Gilead Sciences didn't initiate its dividend until 2015. However, the big biotech has increased its dividend by 10% each year since then. Gilead's yield now stands at 3%. The company is also a cash cow, generating free cash flow over the last 12 months of $14.8 billion.

Gilead's tremendous cash flow stems largely from its antiviral drugs. The company has been a leader in the HIV drug market for more than 20 years. Its HIV franchise currently includes blockbusters such as Genvoya and Truvada. Gilead's hepatitis C virus (HCV) drugs also include huge moneymakers Epclusa, Harvoni, and Sovaldi.

Harvoni bottle and pill

Image source: Gilead Sciences. 

The biggest problem Gilead faces, though, is that its revenue and earnings are falling because of slumping HCV franchise sales. Gilead's drugs have proven to be so effective at curing HCV patients that there aren't nearly as many new patients starting treatment as there have been in previous years. The biotech's dividend shouldn't be in any trouble, however, since Gilead's cash flow remains strong. The company also has a promising pipeline and is likely to make one or more acquisitions to help offset its HCV franchise decline.


Another large drugmaker also claims a strong dividend and free cash flow. Pfizer's dividend yield currently stands at 3.83%. The big pharma company generated free cash flow over the past 12 months totaling $13.6 billion.

Pfizer's hefty cash flow comes from two business segments: innovative health and essential health. Innovative health includes Pfizer's top prescription drugs such as Eliquis, Ibrance, Lyrica, and Prevnar 13. The segment contributes around 60% of Pfizer's total revenue and earnings. Essential health includes legacy brands that have either lost patent exclusivity or soon will do so, such as Celebrex and Lipitor.

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These legacy drugs are weighing down Pfizer's overall performance. However, the company has several products that should help it continue to grow in the future, including cancer drugs Bavencio and Ibrance. Pfizer has also strengthened its lineup through acquisitions, buying Anacor Pharmaceuticals and Medivation last year.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.