High-yield dividend stocks often deliver better-than-average returns for investors over the long term, thanks to the power of compounding. Not all high-yield dividend stocks are table-pounding buys, however. A mouthwatering yield can be a red flag, indicating a company with a deteriorating outlook. Hence, investors have to be exceptionally picky when it comes to this group of passive-income plays.
Which high-yield dividend stocks are worth buying? For my money, I like both Pfizer (PFE 0.63%) and AT&T (T 1.52%) right now. Both companies sport exceedingly high dividend yields (4.6% and 7.83%, respectively), attractive valuations, and entrenched competitive positions. Here's why savvy investors might want to pick up these two high-yield dividend stocks soon.
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The case for buying Pfizer
Pfizer is one of the world's leading pharmaceutical companies, with a diversified portfolio of products that span various therapeutic areas, such as oncology, immunology, rare diseases, and vaccines. The company also has a robust pipeline of innovative drugs that could fuel its future growth.
For example, Pfizer has several potential megablockbusters in development, such as next-generation breast cancer drug PF-07220060 and weight-loss candidate danuglipron. Pfizer also has a strong presence in biosimilars, which are cheaper versions of biologic drugs that have lost patent protection. Biosimilars are expected to grow rapidly in the coming years as more brand-name biologics lost patent protection.
Pfizer has a long history of rewarding shareholders with dividends. The company has paid uninterrupted dividends for over 84 straight years and has raised its dividend for 14 consecutive years. Pfizer's dividend payout ratio, which measures the percentage of earnings that are paid out as dividends, is a reasonable 43%, indicating that the company can afford to maintain and increase its dividend in the future. Pfizer's dividend yield of 4.6% is also higher than almost all of its peers in the diverse healthcare sector.
Pfizer's valuation is also attractive compared to its peers. The company trades at a forward price-to-earnings ratio of 10.8, which is lower than the industry average of 14.4 and the S&P 500 average of 20.3. This fact implies that Pfizer is significantly undervalued relative to its earnings potential and growth prospects.
I've been steadily buying Pfizer stock this year because of its lowball valuation, promising long-term outlook, and attractive dividend yield. However, I don't expect this big pharma stock to be a market-beating vehicle in the short term.
My view is that Pfizer will probably take the better part of a decade to deliver above-average returns because of the negative sentiment surrounding its shares, the overhang from its declining COVID-19 franchise, and the prolonged timeframe required for its recent business development activities to payoff from a growth standpoint. Put simply, I think now is a compelling point to start accumulating this super cheap, dividend-paying pharma stock, with the goal of long-term capital appreciation.
Why AT&T is a compelling dividend stock
AT&T is one of the largest telecommunications companies in the world, with top-shelf positions in both wireless and broadband. The company serves more than 100 million U.S. customers with wireless and broadband services. Moreover, it has steadily grown its all-important wireless segment in recent years, thanks to the sizable improvement in its network quality and customer service. Speaking to this last point, the American Customer Satisfaction Index recently named the telecom giant No. 1 in terms of wireless customer satisfaction.
All that being said, AT&T has been facing some herculean challenges of late, such as legacy infrastructure costs, new low-cost competitors entering the market, and its enormous debt load. Taken together, these headwinds have driven the telecom company's shares to a multidecade low in 2023.
I believe the market's pessimism is wildly overdone at this point. While it's true that AT&T doesn't offer much in the way of bottom- or top-line growth in the near term, the company's shares are now trading at a rock-bottom 5.8 times projected earnings. To put this figure into context, the average forward-looking price-to-earnings ratio within its large-cap telecom peer group currently stands at 12.6. Moreover, its dividend has ballooned to a notable 7.83% as a result of its falling share price this year.
Now, a fair amount of this pessimism stems from the company's potential exposure to legacy infrastructure costs -- i.e., lead cables. But as management noted in the recent quarterly earnings call, the majority of these cables are encased in a protective conduit. So I'm not wholly convinced this issue will be the black-swan event the market seems to be anticipating – based on AT&T's bargain-basement valuation.
All told, I think AT&T stock is an intriguing contrarian buy right now. The company is integral to America's telecommunications infrastructure, it has top-tier positions in key segments like wireless and broadband, and it sports an extremely attractive dividend yield. Like Pfizer, though, I'm not buying AT&T stock with the expectation of generating market-beating results in 2023 or even 2024. This high-yield stock lives comfortably in my retirement portfolio, where I can let its deep value proposition unfold over the course of the next 20 years.
