Companies with high dividend yields may seem attractive, but income stocks are about much more than just above-average yields. Any company’s payouts are at risk without a robust business to back them up. That’s why choosing the right dividend stock depends on looking beyond the company’s yield and fundamentals.
Let’s illustrate this with two examples: Pfizer (NYSE: PFE)And Confidence in medical properties (NYSE: MPW). While both have attractive returns, the former is a worthy investment, the latter not so much. Here’s why.
The highest yielding stock to buy: Pfizer
The pharmaceutical company’s stock is not popular in the market right now, as the stock has underperformed the market significantly over the past two years. In the meantime, the dividend yield of the stock has increased and at the time of writing it stands at 5.7%. Despite Pfizer’s problems, the company is able to maintain its dividend program.
To be fair, Pfizer’s financial results are relatively poor compared to what it delivered in 2021 and 2022 — two years in which sales skyrocketed thanks to its work in the coronavirus space. Still, sales rose well above pre-pandemic levels, a very encouraging sign of secular growth at the company.
Pfizer’s COVID-19 drugs will eventually no longer have much of an impact on its results. In addition, there has been no decline in the company’s research and development costs (which are much higher than pre-pandemic levels), causing operating and net income to fall below pre-COVID levels.
And so there’s a good chance that there are a lot of products in the pipeline that should help the company get back to profitable growth. Currently, Pfizer has over 100 programs in the pipeline. But two areas that the company is focusing its research efforts on that deserve special mention are weight loss and oncology.
The lucrative GLP-1 weight-loss field is growing rapidly. Pfizer’s candidate, oral danugliprone, recently performed well in a phase 2 study.
Then there’s the company’s efforts in oncology. Pfizer acquired Seagen, a specialist in oncology, for $43 billion. CEO Albert Bourla said of the acquisition, “We’re not buying the golden eggs. We’re buying the goose that lays the golden eggs.” Seagen had several approved cancer drugs and a deep pipeline, but it was a much smaller company than Pfizer, with less funding and a smaller footprint in the industry. Now that they’re one entity, Pfizer should become a much more prominent player in oncology.
So, despite a down year or so, the company’s underlying business offers excellent prospects. Pfizer’s dividend should be safe. It has increased its payouts by 17% over the past five years. Pfizer is a solid, high-yielding dividend stock to buy and hold.
The High Yield Stock to Avoid: Medical Properties Trust
Medical Properties Trust (MPT), a healthcare real estate investment trust (REIT), has been hit by major setbacks since early 2023, with the company’s revenue, earnings and stock price all moving in the wrong direction.
Unlike Pfizer, this isn’t because MPT fell from incredible heights. Here’s why. Steward Healthcare, one of the main tenants, was struggling to keep up with rent payments. Steward officially filed for bankruptcy in May.
As a result of this issue, MPT has had no choice but to cut its dividends. This has happened twice since mid-2023. MPT’s yield remains impressive at 5.56%. Still, dividend seekers abhor payout cuts, so MPT may not be the best option at this point.
Some will argue that the company is about to put its Steward-related problems behind it. That’s true. MPT recently signed agreements to place new tenants in 15 of the 23 hospitals formerly operated by Steward Healthcare. The average lease term is about 18 years.
But under the agreement, these new tenants won’t start paying rent until the first quarter of 2025, and even then, they’ll only pay half of the contractual agreement by the end of next year. They’ll ramp things up gradually until they reach the total amount in the fourth quarter of 2026.
This is a victory for MPT: it gets rid of its problem tenant and replaces it with four new ones (more diversification), which (unless they too run into financial problems) will pay regular and predictable amounts on average until at least 2042. However, MPT still has work to do to turn its business around. It still needs to find solutions for some of Steward’s former facilities, including several hospitals under construction.
Even if it were, given the issues it has faced recently, I would recommend staying away from the stock for now. Yes, MPT is improving its business, but it is best to sit back and watch how things develop until it can prove it is officially back by consistently delivering good results.
Should You Invest $1,000 in Pfizer Now?
Before you buy Pfizer stock, here are some things to consider:
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Prosper Junior Bakiny 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.
1 Ultra-High Yield Healthcare Stock to Buy Hand Over Hand and 1 to Avoid was originally published by The Motley Fool
