This Dividend Giant Pfizer Could Turn a Boring Healthcare Allocation Into Serious Income

Pfizer (NYSE: PFE) is one of the world's largest and most respected pharmaceutical companies. That is an important backdrop for dividend investors to consider as they look at the stock's lofty 6.4% dividend yield. For reference, the average pharma stock has a yield of just 1.7%. There's a reason to buy Pfizer beyond the yield.

Pfizer gets you most of the way to 10%

If you buy Pfizer and collect that 6.4% dividend yield, you are roughly two-thirds of the way toward the 10% return that most investors expect from stocks over time. If you reinvest the dividends, you are effectively buying more shares while the stock is unloved. If the stock bounces back, you'll be leveraged to the upside.

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That said, the yield isn't just high on an absolute basis; it's also high relative to other drug stocks. So buying Pfizer as part of your healthcare allocation could help supercharge the income your portfolio generates. The problem, of course, is the risk that the lofty dividend payment can't be supported.

Pfizer is doing the right things

Pfizer's yield is so high because it has important drugs that are going to lose patent protection. That will lead to revenue declines for those drugs. Meanwhile, the company has had notable setbacks in its efforts to develop new drugs, including having to abandon an internally developed GLP-1 weight-loss drug.

These aren't actually unusual events in the pharmaceutical sector. Pfizer has muddled through tough patches like this before. And it is working quickly to address the issues it faces, buying a company with an attractive GLP-1 drug candidate and partnering with another to form a distribution deal. Pfizer isn't just hoping for the best; it is taking the steps needed to ensure better times are ahead.

What about that dividend?

Right now, Pfizer's dividend payout ratio is above 100%. That suggests the dividend comes with some risk, which is true. However, dividends are paid out of cash flow, not earnings, so a payout ratio can rise above 100% for a period without triggering a dividend cut. And Pfizer recently stated that it intends to support the current dividend.

Given Pfizer's long and successful history, it seems reasonable for more aggressive dividend investors to give management the benefit of the doubt. That's true with regard to both the business turnaround and the company's ability to support the dividend until performance improves.

Reuben Gregg Brewer 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.