High-yield dividend stocks are a powerful way to boost a portfolio's annual performance. By reinvesting the dividend and regularly buying more shares, these stocks can produce impressive returns over long periods of time. However, a high yield can also be a warning sign for investors. An unusually generous yield, after all, can indicate that a company is facing a major challenge, such as a new competitive threat, shifting consumer preferences, or a high level of debt.
Which high-yield dividend stocks stand out as top buys right now? Pharmaceutical giant Pfizer (PFE 0.55%) and telecom stalwart AT&T (T 1.02%) screen as attractive value plays right now. Read on to find out more about these two high-yield dividend stocks.
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Pfizer: An underappreciated value proposition
Pfizer stock hasn't been a winning play in 2023. Thanks to declining COVID-19 product sales and looming patent expires for a couple of major revenue generators, the drugmaker's shares have lost a staggering 33% of their value this year. This sell-off, though, could be a gift for patient investors for a couple of reasons.
First off, Pfizer's dividend has swelled to a mouthwatering 4.8% as a result of its falling share price. That's markedly higher than its peer group average of 3.3%. Moreover, the company's broad product portfolio generates ample free cash flow (FCF), which support its generous payout. Speaking to this point, Pfizer sports a trailing-12-month payout ratio of only 43%. Most large pharmaceutical companies have payout ratios above the 50% mark.
Most importantly, Pfizer's robust clinical pipeline, which the company has significantly augmented in recent times through the acquisitions of Arena Pharmaceuticals, Seagen, and Global Blood Therapeutics, among others, should return the drugmaker to solid levels of top-line growth in the second half of the decade.
Savvy investors, in turn, may want to take advantage of this temporary lull in the company's financial performance. After all, Pfizer is a well-established company with a robust dividend program. Its shares also trade at an attractive 9 times projected earnings, which is one of the lowest valuations within the big pharma stock landscape right now.
AT&T: An important catalyst is coming up
Like Pfizer, AT&T has so far had a year to forget. The telecom company's shares have fallen by over 20% this year over a suite of headwinds, such as its high debt load, the emergence of low-cost competitors, antiquated lead-sheathed cables, high capital expenditures, and big misses on its FCF generation during the first two quarters of the year. AT&T's stock may be gearing up for a comeback, however. On Oct. 19, the telecom behemoth is set to release its 2023 third-quarter earnings. If the company meets its own guidance on FCF for the three-month period, its shares ought to perk up in a big way.
What's the big deal? While AT&T's stock does sport an extremely attractive valuation with its shares trading at a paltry 5.87 projected earnings, its real appeal is as a passive income vehicle. At current levels, AT&T pays out an incredible 7.58% dividend yield on an annualized basis, which is head and shoulders about the 1.4% yield average of the S&P 500 index.
Investors have backed away from the company's shares primarily over concerns about a possible dividend cut stemming from its underwhelming FCF generation in the first half of the year. Management has remained confident in its $16 billion FCF target for the full year, and this upcoming earnings release will definitively show whether this confidence is deserved or not. With its shares trading near a historically low multiple right now, it might be worth the risk to buy the telecom stock ahead of this all-important financial release.
