Should Dividend Investors Buy Pfizer Stock for Its High Yield or Invest in Eli Lilly for Its Dividend Growth?
Picking a solid dividend stock to own for the long haul isn't necessarily easy. Balancing safety and dividend income can make it challenging to find the right stock to own, one that offers a fairly high yield, which isn't too risky. If the dividend is likely to grow in value is also an important consideration, as that can give investors an incentive to buy and hold.
Two intriguing dividend stocks that can be appealing options to investors today are Eli Lilly (NYSE:LLY) and Pfizer (NYSE:PFE). The former has been raising its dividend at a high rate for years, while the latter has an incredibly high yield. Which one is the best option for dividend investors today?
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Although Eli Lilly's dividend yields just around 0.6% right now, it has been an excellent income investment to own over the years. If not for the stock's tremendous 400% gains over the past five years, its yield would be far greater than it is today.
A big incentive for holding onto the healthcare stock is the dividend growth. Eli Lilly, because it generates monstrous profits due to its highly effective and successful GLP-1 drugs, has had no trouble raising its payouts. Its current quarterly dividend is $1.73, and that is more than twice what investors were collecting from the healthcare stock five years ago, when the quarterly payout was $0.85.
That amount of dividend growth computes to a compounded annual growth rate of 15.3% -- far higher than the rate of inflation. While Eli Lilly's yield may seem modest, it can become far bigger in the future (depending on how its stock performs). But with strong profits and promising growth opportunities in the GLP-1 market, Eli Lilly is an enticing all-around stock to own.
Finding high-yielding stocks isn't easy these days because of rising valuations, with Eli Lilly being a prime example of that. But Pfizer is one of the highest-yielding stocks available, and its yield may not be as risky as it seems.
At around 6.2%, its payout is far higher than Eli Lilly's and even the S&P 500 average of 1.1%. This makes a tremendous impact for dividend investors because to collect $1,000 in annual dividend income, an investor would need to invest approximately $16,130 into Pfizer's stock versus nearly $167,000 in Eli Lilly.
Pfizer may have an uncertain future ahead as it tries to navigate the next phase of its growth, but the business is not in such disarray that its dividend is not sustainable. The healthcare company has been cutting expenses in an effort to become leaner, and that will strengthen its financials in the process. In the trailing 12 months, the company has generated nearly $11 billion in free cash flow, which is higher than the roughly $9.8 billion it paid out in cash dividends during that stretch. Thus, its payout is not nearly as risky as it may appear to be.
Which stock is the best buy among these two depends on the individual investor.
The investor who wants a good mix of dividends and growth may be better off going with Eli Lilly. Between its terrific growth prospects and its consistently high dividend growth rate, it can offer an excellent balance for investors who don't need a high payout right away.
For investors purely focused on dividends, however, Pfizer becomes the better option. Its yield is high, enticing, and underrated. Although the stock has struggled and declined 37% over five years, it could be overdue for a rally and thus could make for a good long-term investment.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly and Pfizer. The Motley Fool has a disclosure policy .
