Many investors would love to buy passive income stocks with a high dividend yield, a sustainable level of earnings coverage of the dividend, and a cheap valuation. Most of the time, however, they are forced to pick stocks that feature just two of the three (if they're lucky).
But sometimes investors can find that rare stock that features all three, allowing them to have their cake and eat it too. That's the case for the two businesses featured below.
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1. Viatris
It isn't always necessary to make innovative products to be a good dividend payer. For instance, Zoloft, Xanax, Lyrica, Viagra, and Lipitor are just a few of the older household-name drug brands that Viatris (VTRS -0.09%) counts in its portfolio of generic medicines, and while none are new medicines, they're each indispensable to this day.
As you may have noticed, those are therapies that people tend to need to take on an ongoing basis. That's the foundation upon which the investing thesis for Viatris is built, as consistent sales make for reliable cash flows -- a key ingredient in cooking up a dividend policy that'll attract and reward shareholders.
Viatris' forward dividend yield is presently above 5.2%, which is on the high side compared to the market's average yield of around 1.6%. That also makes it a juicier purchase than the average dividend-paying stock, as you'd only need to invest around $1,900 to make $100 in passive annual dividend income.
In terms of the sustainability of its dividend, right now its payout ratio is a very manageable 30.5%. That means its annual earnings could crash by nearly 70% and it'd still have enough money to disburse its dividend at its current rate. But the chances of its earnings falling by so much are practically nil. Its trailing 12-month (TTM) net income actually rose by 604% over the last three years, due to ongoing efficiency improvements and launches of profitable new generic medicines.
You probably shouldn't count on that rapid growth rate to continue forever, though. The generic medicine manufacturing business isn't exactly renowned for its booms, as the demand for inexpensive drugs only rises in line with population growth and expanded access to healthcare.
On that note, the market is still probably underestimating Viatris' opportunities to grow. Its price-to-earnings (P/E) multiple is 5.4, whereas the average P/E of companies in the pharmaceutical preparations industry is 23.4. Over the next five years, it'll be launching new medicines that it expects will add more than $3 billion in annual recurring revenue. And management plans to start significantly ramping up its rate of returning capital in the form of dividends and buybacks before the end of 2023, with more to come as it pays down its debt load of $19 billion. So if you're looking for a bargain on a stock that's likely to become a safe and reliable payor, this one is a decent option.
2. Pfizer
Pfizer (PFE 0.19%) needs no introduction, but investors who are familiar with the company for its coronavirus medicines like Paxlovid and Comirnaty might not be up to speed on what it's doing to prepare for long-term success.
Its forward dividend yield is 4.2%, whereas its payout ratio is 31.7%. Much like Viatris, this pharma's dividend is under absolutely no financial pressure whatsoever, and it still wouldn't be even if earnings took a nosedive. But, for Pfizer, the probability of an earnings nosedive is much higher because it's already in one, which we'll get into a bit more in just a moment.
In terms of its valuation, its P/E ratio is 7.1. For a business with years and years of strong performance and a demonstrated mastery of what it takes to commercialize successful drug after successful drug, that valuation is practically a steal.
Of course, the market isn't entirely off-base in its implied assertion that Pfizer's growth potential is limited in the near term. Its coronavirus medicines are rapidly eroding as a share of its revenue, thanks to lower caseloads and a global population that is no longer scrambling to secure doses of its vaccine. That's also doubtlessly responsible for its earnings ticking down, as shown in this chart.
PFE Revenue (Quarterly) data by YCharts
As you can see, the downtrend of the last few quarters is undeniable, and it might not be done yet. Hence, the market's distaste for the stock's near-term future.
But its coronavirus medicines are unlikely to decline to the point where they bring in literally $0 in sales and earnings, as there will continue to be a consistent level of demand globally for booster vaccinations and antivirals for years to come. And thanks to management's plan to add $45 billion in fresh revenue by 2030 with a combination of new drugs and acquisitions, Pfizer's long-term health isn't under much threat. So if you're looking for a relatively safe and relatively cheap source of dividends, loading up on some shares isn't a bad idea at all.
