High-yield dividend stocks often catch investors’ attention – and for good reason. When established companies make larger-than-average dividend payments, they can provide both significant current income and the potential for longer-term appreciation.
However, unusually high yields can be a double-edged sword. Sometimes they reflect temporary market pessimism, creating real value opportunities. Other times, they indicate legitimate concerns about a company’s ability to maintain its dividend payments despite deteriorating business conditions.
In today’s market, two leading dividend payers in particular highlight this dynamic. Pfizer (NYSE:PFE) And Altria Group (NYSE:MO) both offer returns well above their respective sector averages, with each stock trading at remarkably low forward earnings multiples. Their situation raises classic questions for dividend investors: Does the market’s pessimism create opportunity, or are the risks too great?
I’ll explore how these two dividend heavyweights compare to determine which stocks offer the best opportunities for income-oriented investors today.
Pfizer, one of the largest pharmaceutical companies in the world, is known for developing breakthrough medicines and vaccines and currently yields 6.53%. This is well above the average of 4.2% of the major pharmaceutical companies, while the stock trades only 9x expected earnings. The company’s payout ratio, defined as the percentage of earnings paid out as dividends, is 221%. So the company currently pays more dividends than it earns.
However, the dividend has not yet been reduced. On December 12, Pfizer’s board of directors approved an increase in its quarterly cash dividend to $0.43 per share, marking its 345th consecutive quarterly payment. According to CEO Albert Bourla, this increase reflects “strong financial performance, disciplined execution and our commitment to returning value to shareholders.”
Several upcoming major pipeline developments in 2025 could be critical to the drugmaker’s long-term financial performance and ability to sustain its fairly generous dividend program. Specifically, Pfizer is expected to release once-daily dosing data for its obesity drug candidate danugliprone in early 2025, while multiple oncology programs will also report results next year.
Pfizer’s ability to maintain and grow its dividend appears stronger than its payout ratio alone would suggest. While the company’s transition beyond COVID-19 revenue poses near-term pressure, management’s confidence in increasing the dividend, coupled with potential pipeline catalysts and strategic moves such as the Seagen acquisition, paints a more encouraging picture for income investors.
Altriathe largest U.S. tobacco company and maker of the iconic Marlboro brand, yields an impressive 7.58%, which is higher than the tobacco average of 6.7%. This high yield is backed by a more manageable payout ratio of 67.3%, while the stock trades at just 10.1 times forward earnings.
The US cigarette market has faced persistent headwinds, with volumes declining 6% annually between 2018 and 2023, significantly worse than the 1% annual decline in the global market. However, Altria’s Marlboro brand has a market share of more than 40%, providing crucial pricing power. What’s more, Morning star Analyst Kristoffer Inton expects U.S. volume to decline to about 5% per year as vaping competition diminishes.
Although cigarettes will remain dominant with almost 90% of Altria’s expected sales in 2028, Altria has renewed its efforts to pursue alternative products. The company’s acquisition of NJOY for $2.75 billion marks its return to vaping, complementing its smokeless tobacco and nicotine pouch offerings. Importantly, cigarettes remain relatively affordable in the US market, suggesting there is room for continued price increases to offset volume declines.
For income investors weighing these odds, Altria emerges as the better choice, despite Pfizer’s recent dividend increase. While both companies have shown commitment to their dividends, Altria’s fundamentals paint a more encouraging picture from a dividend sustainability perspective.
Its 67.3% payout ratio also provides significantly more support than Pfizer’s 221%, and its pricing power has consistently offset volume declines. As a result, Altria appears to be the better, high-return play in this head-to-head matchup.
Consider the following before buying shares in Pfizer:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Pfizer wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $859,342!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns December 23, 2024
George Budwell has positions in Pfizer. The Motley Fool holds and recommends positions in Pfizer. The Motley Fool has a disclosure policy.
Better Income Stocks: Pfizer or Altria Group? was originally published by The Motley Fool
