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.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.

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