Are you worried about how safe dividend stocks are right now? One thing you can do is look at stocks that have a very low payout ratio and a healthy margin of safety in case inflation or a downturn in the economy chips away at the company's profitability. A couple of top dividend stocks with incredibly low payout ratios are Pfizer (PFE -0.03%) and Costco Wholesale (COST 0.91%). Should you add them to your portfolio today?
Pfizer is generating tons of cash, largely due to its COVID-19 vaccine revenue. This year, the company estimates it will bring in approximately $100 billion in revenue from all of its products. Because of that, the company expects to report an adjusted per-share profit of at least $6.25. That's plenty of room to cover its dividend, which totals $1.40 per share over the course of a full year.
From a cash flow perspective, the business also looks rock solid. Last year, Pfizer generated around $30 billion in free cash flow, and its dividend payments this year will be around $8.8 billion. Even a steep decline in cash flow -- which is unlikely -- would leave the business with plenty of room to distribute money back to shareholders.
What's even better is that the boost from COVID-19 may last even longer than this year, as the company recently obtained a new order from the U.S. government for an additional 105 million vaccine doses for the fall. And there's an option to increase that to 300 million doses.
There have also been signs that Paxlovid, the company's COVID-19 pill, could be effective in treating "long COVID," the symptoms that persist even after a person has recovered from COVID-19. That's still an untapped opportunity for the healthcare company.
While some investors may be dismissing Pfizer as an overpriced stock that's living off a boost in COVID-19 revenue that won't last, the company will likely be generating strong revenue from its COVID-19 vaccine for the foreseeable future. There's still an ongoing need for vaccinations and booster shots.
Finally, as a result of Pfizer's strong financials and solid future, its dividend yield of 3.1% looks incredibly safe and is a great option for income investors.
Costco's dividend yield of 0.7% isn't terribly exciting -- the S&P 500 offers a yield of 1.7%. However, the company still makes for an appealing income investment.
The big-box retailer doesn't just raise its dividend payments, but also has paid special dividends in the past. Although regular dividend payments are technically discretionary, most companies follow a schedule of when they pay them, and they almost create an expectation for investors.
With special-dividend payments, a company can give investors a big cash infusion if they feel the business has done particularly well. In 2020, amid a surge in pandemic-induced buying that lead to incredible growth numbers for the retail giant, Costco paid a $10 per-share cash dividend.
Without that special payout, the company's dividend per share in 2020 would have been just $2.75, so investors received a massive boost. Costco has also made special-dividend payments in 2017, 2015, and 2012.
The company has also doubled its quarterly dividend payment in the course of six years -- from $0.45 per share in 2016 to $0.90s now. And despite all that growth, the retail giant's dividend still has plenty of room for more hikes in the future. Today, its payout ratio is less than 30% of income and its free cash flow over the past 12 months has been $4.1 billion -- nearly three times the $1.4 billion it paid out in dividends.
In May, the company announced its third-quarter numbers. Sales for the period ended May 8 rose 16% year over year to $52.6 billion. Profits were up 11% to $1.4 billion. Its continued growth, even despite inflation, is impressive and reminds investors why this could be a solid stock to own for the long haul.
The only negative about Costco's stock is its valuation -- it's trading at more than 36 times its future profits, which is more than double the S&P 500's average of 17. At a time when many retail stocks are struggling, now may not be the best time to buy shares of Costco.
Investors are better off putting the stock on a watchlist for now. Its dividend is great, but it's hard to justify such a steep premium for it.