Collecting an above-average dividend payment can sometimes come with risks. High-yielding stocks can be due for cuts to their payouts if a company’s underlying financials aren’t strong enough to support its dividend payments. But that doesn’t mean all high-yielding stocks are dangerous investments.
Two good examples of stocks that pay more than 6% and can still be ideal long-term options for retirees are Pfizer (NYSE: PFE) and Verizon Communications (NYSE: VZ). Although their yields are high, these stocks are not as risky as they may appear to be. Here’s why.
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A bearish outlook for the future has resulted in Pfizer’s stock price tumbling more than 10% this year, despite what has generally been a strong year for the markets. The top healthcare stock is trading around its 52-week low, and its yield is incredibly high at around 6.8%.
Protecting that dividend is a priority for CEO Albert Bourla, who earlier this year referred to the payout as a “sacred cow” for the business, recognizing the importance it has for investors who rely on the recurring payment. Pfizer has been making dividend payments for 344 consecutive quarters, and it has been one of the most stable income stocks to own in the healthcare industry.
The company recently raised its guidance for 2024 in light of strong earnings numbers. However, investors remain worried about the future, including how it will deal with a new U.S. administration and the possible implications that changing regulations may have for its operations, and how it will grow as it faces multiple patent cliffs.
The reason I’m not worried about Pfizer is that regardless of who is in office, there’s going to be a need for constant and ongoing innovation in healthcare. Pfizer has been a top name in that regard for decades. Its acquisition of oncology company Seagen last year highlighted its aggressive growth strategy, as the move cost Pfizer $43 billion. It has also pursued smaller companies over the years in a bid to bolster its pipeline and strengthen its growth prospects.
As for patent cliffs, they are something that every healthcare company with a top drug will have to worry about at some point. But by focusing on expanding and diversifying its operations, Pfizer is in excellent shape to overcome those challenges. Bourla previously said that by 2030, the company may add up to $25 billion in revenue from new drugs and acquisitions, which will help offset losses due to generics.
The company’s earnings numbers have been choppy due to write-downs and fluctuating COVID-19-related sales. But last quarter, Pfizer generated $6.1 billion in free cash flow, which is more than twice what it paid in dividends ($2.4 billion). While the company is undoubtedly facing some challenges, the business is in much better shape than bearish investors may give it credit for.
Retirees can get another mouthwatering yield from Verizon, which currently pays 6.5%. The telecommunications company has also been increasing its dividend for 18 straight years. The most recent increase came in September when the company boosted its dividend by 1.9%. While that’s not a huge increase, it’s still a testament to Verizon’s commitment to growing the payout.
It also comes at a time when the business isn’t growing all that fast. This year, the company anticipates a growth rate between 2% and 3.5% in its core wireless service business. But in the long run, there could be more room for Verizon to get bigger. Earlier this year, the company announced plans to acquire Frontier Communications, which will expand its fiber footprint to more markets. The $20 billion deal would be accretive to both Verizon’s top and bottom lines as soon as it closes. Frontier shareholders approved the deal, and it’s expected to close in early 2026.
Verizon is a top name in telecom, but the stock has been an underwhelming buy in recent years as rising interest rates have made investors bearish on capital-intensive businesses. As rates continue to come down and investors seek safety, it may only be a matter of time before shares of Verizon start to rally. While the stock isn’t trading at its low for the year, it’s still an incredibly cheap buy. Investors can buy it today for less than 9 times next year’s estimated profits (based on analyst expectations).
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
