If you're thinking of investing in Pfizer (PFE +1.56%) to generate some passive income from your portfolio, you won't need to spend very much to do so, provided that you're willing to play the long game.
In fact, getting $500 in annual dividends from this stock is almost certainly within reach for you, as long as you have enough patience to wait a few years. Here's how.
NYSE: PFE
Key Data Points
Dollar-cost averaging is a powerful tool
Building up a passive income stream is often a lot more manageable when you can do it piece by piece rather than paying out a large lump sum. Dollar-cost averaging (DCA) refers to buying a few shares of a stock here and there over a period of time so that you don't need a lump sum to reach your target position size. The longer you're willing to spend building up your position, the less money you need to commit at any given interval.
One of the other main features of using DCA as your strategy is that day-to-day price fluctuations won't bother you. Your shares are purchased at so many price points that it takes a major deviation to impact your position by a significant amount. And that's especially true if you decide to build your position at a leisurely pace, like with a very small investment every week or every month.
Let's look at an example with Pfizer stock. At the moment, Pfizer's forward dividend yield is 4.4%. That means if you were to try to invest all at once to make $500 in passive income annually, you'd need a total of around $11,111.
While that isn't an unattainable sum, it's more than most investors have lying around. Of equal importance is that if you're investing for retirement or general wealth building using your salary as your primary source of cash to invest, $11,000 is a chunk of change that might be frightening to commit to a single stock all at once.
Let's say you're willing to take one full year of DCA to generate the $500. In that case, you'd need a monthly investment of roughly $925, or $213 per week. That's still enough money to stretch most budgets, but for some people it could be doable. That's, of course, assuming that Pizer's share price remains constant for the full 52 weeks. If the stock price climbs over that period, you would then need to invest more to generate the same $500 in dividends.
But if you're patient and building up your Pfizer position over the course of five years doesn't sound like it's too long to wait, you'd only need to invest around $43 per week to reach the same $500 in annual passive income. Of course, you probably shouldn't be buying shares of Pfizer every week as your sole investing activity for the five-year period, as it's not good to put all your eggs in one basket.
Similarly, a lot can change in five years that would throw the plan off -- even something good, like Pfizer's share price increasing, would make it so the later-purchased shares experience a lower dividend yield than the earlier ones. However, if your portfolio is already sufficiently diversified, you can indeed still generate a bit of passive income with a relatively small, consistent commitment.
Will Pfizer be good for its dividend?
Now that we've established how much it'd cost you to fill out your Pfizer position, the question is whether the five-year plan can actually work as advertised, given what's going on with the company and the market right now and what's likely to occur in the coming years.
In short, there is a near-certainty that Pfizer will be able to continue paying out its dividend over the next five years, and it is very likely that its dividend will rise, potentially by a substantial amount. Its payout ratio is currently 31.7% of its earnings, which totaled $29 billion in the trailing-12-month (TTM) period.
While it's true that its earnings will likely decline a bit over the next year, as sales from its coronavirus medicines fall to reach their long-term sustainable level now that the pandemic is ebbing, the company's bottom line could shrink by a huge amount before the dividend would be on the chopping block.
Furthermore, over the last 10 years, its dividends per share rose by an average of 6.1% annually. While in the last few years that rate has decreased to be near a crawl, and certainly less than the rate of inflation, the point is that a business with a long-term history of repeated dividend hikes will be loath to stop increasing its payout unless it is necessary for survival. And for Pfizer, it simply isn't, and thanks to its plethora of programs in the pipeline and many new medicines expected to come to market over the next few years, that is unlikely to change.
