High dividend yields can be tempting, but can also raise a banner for income investors.
Pfizer's decline in valuation has increased its output to more than 7%, which makes people look at it more closely.
The company's expenditure ratio and free cash flow can help investors evaluate the safety of dividends.
When stocks earn more than 5%, investors begin to be skeptical about whether spending is indeed safe. While it's easy to believe that it can be safe and can be a great source of future dividend income, you don't want to be burned and see dividends cut or suspended.
Consider pharmaceutical giants Pfizer (NYSE:PFE). Currently, its dividend yield is about 7.5%, and if the stock continues to decline, it may soon be 8% after that. The biggest question is, is this really a deal and a good buy, or is it possible that Pfizer will have to cut its dividend soon?
Where to invest $1,000 now? Our team of analysts just revealed what they think is 10 Best Stocks Buy it now. continue"
A good starting point for investors in analyzing dividend stocks is to look at their spending ratios. This takes into account the dividend of the company's earnings per share (EPS). The higher the rate of EPS is associated with dividend per share, the lower the expenditure ratio, the more sustainable the dividend is.
The company currently pays a quarterly dividend of $0.43, and a full year total of $1.72. In 2024, Pfizer's diluted earnings per share was only $1.41, which is much lower than its annual dividend ratio. However, this could be somewhat misleading as the company generates billions of dollars in terms of restructuring expenses and asset damage expenses. These are non-cash items, but they can still affect the bottom line and make the company's payment ratio seem worse than others.
That's why I said the payment ratio could be a good one starting point When analyzing income stocks, but a high percentage does not mean that investors should assume that dividends are doomed to fail. A better option is to view the company's free cash flow.
Free cash flow tells investors how much cash a company is generating after deducting capital expenditures. This is an important indicator because it does not include noise usually from non-cash items such as impairment fees and other non-recurring accounting adjustments.
Last year, Pfizer's free cash flow totaled $9.8 billion, with its cash dividend payment of $9.5 billion. This shows that spending is indeed sustainable, as Pfizer generates more cash than dividends spend. There are no huge buffers there, but there are no big red flags.
Of course, a wildcard is from the perspective of income and free cash flow, how companies will conduct tariffs in tariffs and whether these businesses will have a huge impact on their operations.
Pfizer's dividend looks safe now and the stock trades are worth only 8 times its estimated future earnings, which may prove to be a cheap buy. It is valued at a low enough level that it provides investors with excellent safety if revenue worsens this year.
In the past, Pfizer CEO Albert Bourla called the dividend “the holy bull,” which suggests that the loss of damage to the company’s dividend policy is required. While tariffs do pose risks to the business, it is difficult to predict that they may affect Pfizer’s operations and how long they are effective. I do not recommend making rash decisions based on them.
Although the stock is already low, for long-term investors, the stock has been falling this year, but it could be a good health care stock that I forgot for a long time.
Before you buy stock at Pfizer, consider the following:
this Motley Fool Stock Advisor The analyst team just confirmed what they think is 10 Best Stocks Investors buy now…and Pfizer is not one of them. Ten stocks with layoffs could generate monster returns in the coming years.
When to consider Netflix On this list on December 17, 2004...If you invested $1,000 when you suggested, You will have $598,818! * Or when Nvidia This list was listed on April 15, 2005...If you invested $1,000 when you suggested, You will have $666,416! *
Now, it's worth noting Stock ConsultantThe overall average return is 872% - Compared to market sprints 160% For the S&P 500 index. Don't miss the latest top ten list, available when you join Stock Consultant.
View 10 stocks »
*Stock consultant returns as of April 28, 2025
David Jagielski has no position in any of the stocks mentioned. Motley Fool has a place and recommends Pfizer. Motley Fool has a disclosure policy.
Pfizer's dividend yield is 7.5%. Is it still safe? Originally published by Motley Fool