Any investor looking for the highest-paying dividend stocks would do well to start in Big Pharma, where many of the top picks offer yields in excess of 3% or 4%. Yet the highest-paying stocks aren't always the best dividend stocks for your portfolio, particularly when an uncertain company foundation or unsustainable dividend yield is at play. The pharmaceutical industry is no exception, and several of the top dividend payers face uncertain futures.
How do you know which of the top dividend yields in big pharma are worth your investment? Let's check out the five highest dividends in this industry to separate the strong stocks from the shaky ones.
No. 5: AbbVie, 3.4% dividend yield
AbbVie (NYSE:ABBV) opens up the top five dividend stocks in big pharma with its 3.4% dividend yield, an offering that few income investors would turn down. This is a tough company to grapple, however: Because AbbVie's so young, we can't find a dividend history to give a clear idea of this company's commitment to raising its yield. AbbVie's cash flow is no slouch, and the company's payout ratio is just 10%, seemingly offering plenty of room to grow that 3.4% yield in the future. While the next few years should serve income investors well, this high-paying stock isn't without questions.
Immunology drug Humira is the lifeblood of this firm, making up more than 50% of total sales last quarter after pulling in a whopping $9.3 billion in revenue last year. This titanic blockbuster is a stable, steady cash cow for AbbVie's near future and makes this stock a nice pickup for income investors, but the game changes after 2016. That's when Humira's patent protection expires, and if a generic competitor emerges, the company's financial foundation could take a huge blow. The company has promising candidates in its pipeline, but for income investors looking for a long-term safe pick to consistently deliver a nice dividend, AbbVie has just a few years left of Humria's unchallenged dominance before a cloudy future arrives.
No. 4: Eli Lilly, 3.5% dividend yield
Eli Lilly's (NYSE:LLY) 3.5% dividend ranks fourth in big pharma, and the company's dividend history is appealing -- until you reach 2009. For the first decade of the century, Eli Lilly raised its dividend every year, much to the delight of investors. Since 2009's raise, however, the stock's dividend has flatlined. Eli Lilly's 47% payout ratio offers acceptable room for growth, but the company's cash flow has been nothing pretty recently. Unfortunately, this company's future isn't looking like much for income investors to stake their bets on, either.
It's been smacked by patent expirations that have taken a bite out of revenue, leveling the firm's cash flow. Major blockbuster drug Cymbalta, Eli Lilly's best pharmaceutical performer, also will lose patent protection this year in another blow to this pharma's future. Eli Lilly is counting on several strong drug candidates in its pipeline to make up for losses today, but investors shouldn't count on an uncertain future here. It'd be surprising if Eli Lilly raises its dividend soon while under such pressure.
No. 3: Merck, 3.7% dividend yield
Merck (NYSE:MRK) is one of the biggest household names in big pharma and a member of the Dow, but that doesn't mean this company's a shoo-in as a standout dividend stock. While Merck's 3.7% yield is nice, the company's eyebrow-raising dividend payout of 87% suggests that it'll have a tough time increasing that yield soon. Merck's dividend history reinforces that notion: Although Merck has raised its dividend twice since 2011, the firm went from between 2004 and 2011 without raising it once. That's not exactly a commitment that income investors can rely on.
Like Eli Lilly, Merck's also facing a shaky future that doesn't definitively offer the long-term stability that dividend investors need. Major blockbuster drug Singulair's patent expiration has hit sales hard, and while Merck has stepped up other drugs such as its diabetes pair Januvia and Janumet to combat Singulair's falling revenue, the company's pipeline offers just a few promising candidates in late-stage trials. Januvia and Janumet look to have a bright future, and Merck is a safer pick than the likes of Eli Lilly, but this company's sizable dividend may not be on the rise in the near future unless it can pick up sales in a hurry.
No. 2: GlaxoSmithKline, 4.2% dividend yield
GlaxoSmithKline's (NYSE:GSK) 4.2% dividend is a great offering from this big pharma titan, but an 88% dividend payout ratio -- even worse than Merck's hefty number -- is a tricky obstacle to growing that yield. Fortunately, Glaxo's shown a commitment to raising its dividend lately, although whether that's a good thing to do while the company's revenue has been under pressure the last few years is questionable. Fortunately, Glaxo's business offers plenty of upside that makes this a safe, strong stock for income investors.
Although Glaxo's facing a few patent expirations in coming years, the company has a bountiful pipeline with 14 drugs that could present late-stage clinical data soon. That's a big key to offsetting potential revenue hurdles from patent losses, particularly with a few drugs already under review by regulators on both sides of the Atlantic. The company's a big player in combating one of America's deadliest diseases, COPD, and its current drug portfolio is enough to keep this firm surging ahead. This is one high-paying dividend stock that won't disappoint income investors.
No. 1: AstraZeneca, 7.4% dividend yield
AstraZeneca (NYSE:AZN) is a quick turnabout from Glaxo. While this firm's 7.4% dividend yield easily tops the pharmaceutical industry, a troublesome 62% payout ratio and floundering financials don't paint a picture of stability. AstraZeneca's future is questionable at best, and it's nigh impossible to predict where this firm will end up in a few years. It's hardly the type of steady, strong stock that income investors can rely on.
It all starts with -- what else -- patent expirations. The company's revenue has nosedived lately, falling 17% year-over-year in 2012 after schizophrenia drug Seroquel lost patent protection last year. Top sellers Nexium and Cresta also face patent expirations in the next few years, and this company's pipeline is anything but promising. AstraZeneca has flirted with acquisitions to bolster its meek cache of developmental drugs, but right now, this is one of big pharma's most troubled stocks. It's hardly a recommendation for any investor, even with that tantalizing dividend. A nice yield isn't enough to hide a company in trouble.
Strong businesses, strong dividends
Big pharma has some high-paying dividend stocks, but not all top yields are alike. Glaxo's 4.2% dividend yield is one investors can count on, but the other companies on this list face serious questions in the next few years that could dissuade more risk-averse investors. Among the biggest pharmaceutical firms, a few stocks offering smaller dividends -- such as Pfizer's 3.3% dividend and Sanofi's 2.4% yield -- come with standout businesses attached, making these more attractive dividend stocks for investors in the long term. And if the business isn't good, it's not worth your investment.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.