Dividend stocks are sensitive to interest rates. When rates fall, studies show that money managers tend to migrate into income-oriented equities, especially stocks with yields above the 1.35% average of the S&P 500.
While considerable debate exists regarding when the central bank will start to lower rates this time around, there are some signs that the U.S. labor market, economy, and core inflation may be cooling.
If this line holds, the Federal Reserve is likely to respond by cutting rates sooner than later, which should be a boon for high-yield dividend stocks.
Which high-yielders stand out as attractive buys heading into this event? Healthcare titans AbbVie (NYSE: ABBV) and Pfizer (NYSE: PFE) both offer shareholders stellar yields, historically cheap valuations, and a proven track record of value creation over long periods.
AbbVie: A top dividend growth stock
AbbVie is a powerhouse dividend payer. Apart from its superb yield of 3.87%, the company has also increased the size of its dividend checks by a blistering 10% per year over the past five years, which stands in stark contrast to the 6% average annual raise among top dividend growers at large (author’s data).
Moreover, AbbVie’s shares trade at under 15 times forward earnings, which also compares favorably to the nearly 21 times forward earnings multiple of the S&P 500. In short, the drugmaker offers a hefty yield and a proven commitment to raising the payout at above-average levels, and it is attractively priced.
What’s the catch? AbbVie is managing the loss of market exclusivity for Humira, an immunology medication that was its core cash cow from 2013 to 2023. The silver lining is the company is managing this patent expiration well.
Sales of newer immunology meds Skyrizi and Rinvoq are off to a sizzling start, and neuroscience drug Vraylar is performing above expectations since grabbing a label expansion for major depressive disorder in 2022.
Although investors will have to keep an eye on some late-stage immunology meds from other drugmakers, AbbVie appears to be deeply undervalued heading into a round of potential rate cuts.
Pfizer: A robust yield at a bargain-basement price
For those who are steadfast long-term investors, Pfizer is a must-have in your income portfolio at this moment. With a dividend yield of 5.87% and shares priced less than 13 times future earnings, the pharmaceutical giant’s stock is poised to outperform the market in the next 10 to 20 years.
Pfizer is a leading player in the global pharmaceutical industry, sporting a wide range of major drugs and potential pipeline candidates across all key therapeutic areas. Its vast scale, expertise, and growing innovation capabilities set it up for robust performance in the coming decade and beyond.
Why is Pfizer’s stock trading at a discount compared to the S&P 500? The company’s revenue took a significant hit due to the slowdown in sales of its COVID-19 products after the official end of the pandemic. Additionally, its series of acquisitions, primarily driven by its pandemic windfall, didn’t manage to spark investor interest.
This lack of enthusiasm is not surprising, considering the current hype around weight loss medications. While Pfizer is not seen by most analysts as having a leading obesity treatment, this narrow perspective overlooks the bigger picture.
Pfizer is shifting its focus toward oncology, a space known for its pricing strength, inherent competitive barriers, and above-average commercial lifespan. Considering the historical trend of high-dividend yield stocks outperforming over long periods, Pfizer scans as a top pick for dividend investors right now.
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George Budwell has positions in Pfizer. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
2 High-Yield Dividend Stocks to Buy Right Now was originally published by The Motley Fool
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