Some dividend stocks are better than others. The differentiator is how strong the underlying businesses are that make the dividends possible.
Winning over the long term
Keith Speights (AbbVie): If you only focused on the short term, you might turn up your nose at AbbVie. The big drugmaker posted a disappointing second-quarter update last week, causing its shares to tank. AbbVie also faces biosimilar competition in the U.S. for its top-selling drug, Humira, beginning next year.
However, limiting your horizon only to AbbVie's near-term prospects is quite literally short-sighted. That's especially the case if you're looking for solid income.
AbbVie ranks as a Dividend King, with 50 consecutive years of dividend increases under its belt. Its dividend yield currently tops 4% -- a level that almost any investor would love. The company has also increased its dividend by more than 250% since spinning off from Abbott Labs in 2013.
The dividend program shouldn't skip a beat even with Humira likely to experience a steep sales decline next year. AbbVie has other products that are poised to take up the slack, notably including autoimmune-disease drugs Rinvoq and Skyrizi.
It's possible that Medicare pricing changes in a proposed bill making its way through the U.S. Congress could negatively impact AbbVie and other big drugmakers. However, AbbVie is quite adept at adjusting as needed. My view is that the company will truly be unstoppable over the long run.
A temporary slowdown
Prosper Junior Bakiny (Bristol Myers Squibb): Distributing money as dividends and pouring funds into research and development efforts has paid off for Bristol Myers Squibb (BMS) and its shareholders. Investors have benefited from a 31.71% increase in payouts over the past three years, even amid the challenging coronavirus-related economic period we traversed. With a modest cash payout ratio of 31.4%, BMS' dividends haven't hit the ceiling yet.
The company's business should continue to generate the money necessary to sustain its payouts despite recent headwinds. BMS is dealing with the loss of patent exclusivity for oncology medicine Revlimid, one of its most important products. But other therapies are picking up the slack. Sales for cancer drug Opdivo continue to grow as it earns label expansions. Blood thinner Eliquis also continues to enjoy positive momentum.
Most notably, BMS' research and development efforts are bearing fruit, with several new approvals already in the past year and a half and more on the way. The drugmaker's new product portfolio includes cancer medicines Opdualag and Breyanzi, along with Camzyos, which treats a heart-related disorder. There is more where that came from, too. BMS expects $10 billion to $13 billion in revenue from its lineup of newer drugs by 2025.
Admittedly, the drugmaker's 2% year over year revenue growth to $11.9 billion in Q2 doesn't look impressive. But BMS is just entering a new cycle, with brand-new products that will drive top-line growth to higher levels. And, of course, the pharma giant will continue with its capital allocation strategy, developing new innovative therapies and rewarding shareholders through dividend increases. That's why it's a good pick for income-seeking investors.
Huge profits to fund acquisitions and dividend growth
David Jagielski (Pfizer): One of the dividend stocks I'm most confident about right now is Pfizer. The COVID-19 vaccine maker is rolling in the dough. It has been generating enough cash to pursue acquisitions, buy back shares, and still pay a dividend. And Pfizer's dividend yield of 3.2% is twice that of the S&P 500 average of 1.6%.
The drugmaker released its latest earnings numbers last month. Second-quarter diluted earnings per share of $1.73 grew by an incredible 77% year over year. To put that into perspective, consider that Pfizer pays $1.60 per share in dividends over the course of a full year. It made enough in profit to cover the entire year of dividends during just a single quarter.
The level of profit that Pfizer is generating today may not remain this high, especially if COVID-related revenue starts to decline. The company expects half of its top line in 2022 to come from its COVID-19 vaccine and pill. However, Pfizer has been acquiring multiple businesses in the past year that can help accelerate its growth in the future (including ReViral, Arena Pharmaceuticals, and Trillium Therapeutics).
Pfizer's business looks unstoppable given the growth potential it has. Its dividend is likely to keep rising as a result of this growth. Even with a slowdown in revenue, there could still be plenty of room for the company to not just pay but also boost its dividend payments.
What I like about Pfizer's approach is that it hasn't been aggressive with respect to dividend increases, giving itself plenty of breathing room and avoiding a situation where the company's payout is high and potentially burdensome. That being said, the payout has still risen by 25% over the past five years, averaging a compound annual growth rate of 4.6%.
If you're a long-term investor who values dividends, I think Pfizer is one of the best stocks you can buy right now.