Pfizer’s Dividend Yield Is Now 5%. Is the Stock a No-Brainer Buy for Income Investors?

Did you know that if you have a high-yielding dividend stock that pays 5%, investing just $20,000 would be enough to generate $1,000 in annual dividend income? High-yielding stocks can be extremely valuable in helping to grow your portfolio.

One top healthcare stock that provides investors with a yield of more than 5% today is Pfizer (PFE -1.33%). Investors have turned bearish on the stock this year, and that has sent its yield up. Here’s a closer look at what has investors down on the stock and whether it could potentially be a good buy right now.

The company recently slashed its guidance

On Oct. 13, Pfizer released an updated guidance, and it was all-around bad news for the company’s investors. This year, the company projects its top line will be within a range of $58 billion to $61 billion. Previously, the company was expecting its revenue to total between $67 billion and $70 billion. Overall, it amounts to a $9 billion reduction on both the high end and low end of the previous forecast.

Pfizer blames the more pessimistic outlook on demand for its COVID-19 vaccine and pill. Demand simply hasn’t been as strong as the healthcare company anticipated it would be. That suggests the 24% vaccination rate the company was projecting for the year may be even lower.

As a result of the more troubling outlook, the company is looking to slash costs to the tune of $3.5 billion, which will include layoffs. It’s a sign that this isn’t just a temporary dip in demand; lower COVID-19 revenue is likely going to be the new normal. 

Is the dividend still safe?

Pfizer investors have been bracing for a sharp decline in revenue after the company hit a record $100 billion in sales in 2022, thanks in large part to its COVID-19 products. The updated guidance means that the top line will decline by as much as 42% this year. Investors have been dumping the healthcare stock as shares of Pfizer are down close to 40%, with the recent guidance only giving them more of a reason to sell. 

The company still pays a quarterly dividend of $0.41, which now yields 5.2%. That’s a high payout, considering that the S&P 500‘s yield is just 1.6%. Pfizer’s stock is now around the price it was back in 2020, during the early stages of the pandemic and well before it brought its COVID-19 vaccine to market. 

Pfizer’s payout ratio is around 43%, suggesting that even with a drop in earnings, there should still be room to pay the dividend. But it could get tight, as over the trailing 12 months, the company has paid $9.1 billion in dividends, and its free cash flow has totaled $10.7 billion. There is a buffer there, but it isn’t a huge one.

Should you invest in Pfizer stock?

Pfizer is a company that is in the midst of a transition. It has been busy investing in businesses to expand its growth opportunities as part of its plan to add $25 billion in new revenue by the end of the decade. That’s to help offset declining revenue from COVID-19 products and drugs that are losing exclusivity. 

There’s always going to be a risk in investing in a company that’s in a transition and changing the makeup of its business. Pfizer isn’t a no-brainer buy for that reason, but it could still be a good investment in the long run. It hasn’t been standing idle, and it has been investing in its future.

Given the buffer in its payout ratio, the worst-case scenario for investors in the near term may be that the company stops increasing its dividend. But with a high yield and the business aggressively pursuing growth opportunities, this could make for a good contrarian investment to buy and hold.