High-quality dividend stocks can be a great way to tilt the odds in your favor as an investor. After all, companies with a rich tradition of paying dividends tend to sport rock-solid balance sheets, stable free cash flows, and elite management teams. Dividend investing, though, does have a well-documented problem: The vast majority of these equities are expensive relative to non-dividend-paying stocks.
The core reason is that top-shelf dividend stocks generally have a long-standing shareholder base due to the reliability of their payouts. So, on the rare occasion a blue chip dividend stock screams as a bargain, it's always a good idea to understand why.
Keeping with this theme, the global biopharma giants Gilead Sciences (GILD -1.15%) and Pfizer (PFE -0.12%) both fall into the bucket of "cheap dividend stocks" based on multiple valuation metrics (price-to-earnings ratio, price-to-sales ratio, earnings yield, etc.), despite offering well-above-average yields on an annualized basis.
Image source: Getty Images.
Should investors buy these cheap dividend plays? Let's take a deeper look at each company to find out.
Gilead Sciences: An undervalued momentum stock
With an earnings yield of 8.99%, California-based Gilead Sciences comes in as the fourth-cheapest large-cap biopharma stock on this key valuation metric. The biotech's 3.71% annualized dividend yield is also among the highest within its immediate peer group. Even so, Gilead's shares have been outperforming the broader markets over the past 12 months, with the biotech's share price rising by a stately 38% over this period.
Nonetheless, Wall Street analysts think the biotech's stock remains deeply undervalued right now. The lowdown is that analysts believe that Gilead's positive momentum in the high-growth cancer space, spearheaded by the breast cancer drug Trodelvy and blood cancer therapy Yescarta, along with its market-leading HIV franchise, isn't being properly valued by this moody market.
Speaking to this point, the current consensus price target among analysts covering this biotech stock implies an upside potential of nearly 9% over the next 12 months. That's a fairly healthy outlook for a blue chip dividend stock that sports a dividend yield more than twice as high as the average yield among stocks listed on the benchmark S&P 500.
Now, Gilead's low-single-digit revenue growth forecast in 2024 isn't going to win over dyed-in-the-wool growth investors. But the biotech's deep clinical pipeline, emerging oncology franchise, and sizable yield are all solid reasons to consider picking up this cheap dividend stock right now.
Pfizer: A top passive income play
Pfizer stock screens as the third-cheapest among major drug manufacturers, based on its whopping 9.45% earnings yield. Its 4.07% annualized dividend yield is also the third-highest within the space.
Unlike its peer Gilead, however, Pfizer's shares have been trending in the wrong direction over the prior 12 months. As a result of the anticipated drop in demand for the COVID-19 vaccine Comirnaty and antiviral drug Paxlovid, Pfizer's shares have struggled mightily over this period.
Now, Pfizer has been aggressively pursuing business development opportunities to shore up its underlying value proposition, with the latest being the $43 billion acquisition of cancer specialist Seagen. But these various deals aren't expected to have an immediate impact on the drugmaker's top line. Most of these acquisitions, in fact, are likely to deliver the bulk of their value in the back half of the decade.
Although Pfizer does have the financial firepower to buy additional revenue in the near term, the stock's main appeal -- as things stand now -- is undoubtedly its enormous yield.
