Market pullbacks aren't all that fun for investors who don't have much cash on the sidelines. But for those who have plenty of dry powder and are looking for better bargains, market pullbacks can be great. And that's especially the case for buying dividend stocks, because lower stock prices push their yields higher.
Investors have loved Pfizer's dividends for decades. There's still plenty to like. The big pharma company's dividend currently yields just under 4%. Pfizer also appears to be in good shape to keep the dividends flowing, with the drugmaker using less than 78% of earnings and only 57% of free cash flow to fund its dividend program.
Pfizer stock also looks like a relative bargain. Its shares trade at a little over 11 times expected earnings. And Pfizer's trailing-12-month earnings multiple of 9.7 is near the lowest point that it's been in the last 10 years.
Even better news is that Pfizer's earnings should increase more over the next several years than they have recently. The company's lineup includes fast-growing Ibrance, which is on track to become the world's No. 5 best-selling cancer drug by 2022. Eliquis, the blockbuster anticoagulant co-marketed by Pfizer and Bristol-Myers Squibb, is growing sales even faster than Ibrance.
The company has its problems, particularly with sales declines for its essential segment, which includes older drugs that have either lost patent exclusivity or will do so soon. On the other hand, Pfizer thinks that it could win approval for up to 15 new drugs or new indications for existing drugs with blockbuster potential. Overall, now looks like one of the best times in years to buy this longtime pharma winner.
Verizon offers an even more attractive dividend than Pfizer. The telecom giant's dividend yield currently stands at 4.81%. Verizon's dividend also appears to be pretty safe. The company's payout ratio is less than 60%. Although Verizon's free cash flow generated over the last 12 months is lower than its dividends paid, that's due to the company's large capital investments.
The telecom stock trades at less than 11 times expected earnings. On a trailing-12-month basis, Verizon's earnings multiple is less than 7. As with the case with Pfizer, Verizon's trailing earnings multiple is near the lowest it's been over the last decade.
You can't blame only the latest market pullback for Verizon's relatively low valuation. The company didn't have a great 2017, starting off the year by losing over 300,000 wireless subscribers. Verizon changed its strategy, though, and remains the largest wireless carrier in the U.S.
The big driver for Verizon's growth will likely be high-speed 5G wireless networks. These networks could be faster than most home internet connections, which would open up a wide range of possibilities for Verizon to offer new services. Verizon is already launching its 5G networks in some cities. I think the company will remain a leader in the technology, which makes Verizon an inexpensive dividend stock with the potential to grow in the future.
Wells Fargo's dividend yields 2.82% right now. The big financial services company is in better shape than most to keep paying out -- and potentially increase -- its dividends. Wells Fargo uses less than 40% of its earnings and only 40% of free cash flow to fund its dividend.
Although Wells Fargo stock gained more than 10% in 2017, its lagged its peers. The company continued to reel from the aftermath of its fake accounts scandal as well as other issues that emerged. The stock now trades at less than 10.5 times expected earnings and less than 14 times trailing-12-month earnings. Both multiples rank Wells Fargo among the least expensive stocks in its peer group.
Unfortunately for Wells Fargo, the negative impact of its past scandals isn't over yet. The Federal Reserve recently penalized the company by limiting the growth of its assets until Wells Fargo can prove that its house is in order. This move by the Fed could cause Wells Fargo to forego around $400 million in profit this year.
Still, though, tax reform and rising interest rates should benefit Wells Fargo in 2018 and beyond. The Fed's restriction is expected to last throughout most of this year, but the company will eventually move on from the mistakes of its past. In my view, Wells Fargo will recover, making this dividend stock a bargain at current price levels.
What if the market keeps falling?
Some investors might be leery of buying any stock, even a solid dividend stock, for fear that the market could keep falling. Don't be.
If you need cash for the short term, you shouldn't deploy that money by buying stocks anyway. If you don't need the money for the short term, your only concern should be the long-term prospects of the stocks you buy. I think that the long term looks bright for Pfizer, Verizon, and Wells Fargo. Buying them at attractive valuations improves your chances of long-term gains. And with their great dividends, these stocks will pay you while you wait.