Dividend stocks are a great way for investors to generate passive income that can be more reliable and predictable than investing in stocks for pure appreciation. While there are no guarantees in the stock market, investors who carefully analyze a company’s cash flows and earnings should be able to get a pretty good idea of whether a company can keep paying its dividend, and if it is poised to gradually increase its quarterly dividend each year.
Both Realty Income(NYSE: O) and Pfizer(NYSE: PFE) are two companies with high-yielding dividends and that have paid dividends for many years. Let’s take a look at each and see which one is the better dividend stock to own.
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The large pharmaceutical companyPfizer(NYSE: PFE) is best known for its role during the pandemic when it helped produce vaccines to immunize people from COVID-19. During those years, the company and stock performed extraordinarily well. But in recent years, investors have been somewhat concerned about the company’s future. The stock is down more than 30% during the past five years.
Pfizer acquired Seagen in late 2023 and has turned its attention to cancer treatment, promising to deliver several big drugs by 2030. The acquisition of Seagen and other smaller acquisitions are expected to increase annual revenue by $20 billion by 2030. However, over the next few years, several of Pfizer’s big patents will expire, which management thinks could lower revenue by $17 billion to $18 billion between 2026 and 2028.
So where does the dividend stand? Well Pfizer has a pretty solid track record. The company has paid a dividend for 345 consecutive quarters and raised its dividend for the past 16 years. During the past year, Pfizer had a free cash flow yield of 8.75%, so it’s able to cover the dividend yield right now. Through the first six months of the year, Pfizer’s dividend payouts are equivalent to about 83% of earnings and half of its adjusted earnings.
Known as “The Monthly Dividend Company,” Realty Income(NYSE: O) is a real estate investment trust (REIT). REITs are a type of corporate structure that avoids paying corporate taxes so long as they pay out 90% of taxable income through dividends and follow other conditions such as investing in and deriving significant income from real estate.
Realty Income is a triple net lease operator, meaning it leases properties to tenants who are responsible for property taxes, insurance, and maintenance costs. This is a good deal for Realty Income because it requires less work on its part, while tenants may be able to negotiate multi-year leases and lower rents for taking on the added responsibilities. Realty Income focuses on non-discretionary, low price point, and service-oriented customers like convenience and grocery stores, home improvement, and quick service restaurants. The company is also expanding in faster-growth sectors like gaming and data centers.
The dividend has been an area of strength for Realty Income. The company has paid monthly dividends for 30 consecutive years and had a 4.2% annual dividend growth rate in that time span. Realty Income also appears to be managing its dividend well. Through the first six months of the year, adjusted funds from operations (AFFO), which is essentially like free cash flow for a REIT, came in at $2.11, while dividend payouts per share were about $1.60.
Both of these companies have high-yielding dividends and are poised to continue to pay and increase their dividends. However, I find Realty Income’s to be more reliable right now, even if it doesn’t yield as much as Pfizer’s. Realty Income has a good operating model, a great track record on the dividend front, and looks like it can easily cover the dividend.
Again, I find Pfizer intriguing, but I think there is some uncertainty when you consider the patents that will expire. The potential $20 billion increase to annual revenue by 2030 is of course compelling, but if something were to go wrong, that could potentially affect the dividend, which is why more confidence behind the company’s drug and revenue pipeline is needed for me to pick Pfizer over Realty Income.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer and Realty Income. The Motley Fool has a disclosure policy.
