Are you worried about how secure your dividend is now? One thing you can do is look at stocks that have a very low payout ratio and a healthy margin of safety in the event of inflation or economic downturns eroding the company’s profitability. A couple of top dividend stocks with incredibly low payout ratios Pfizer (PFE -1.61%) And the Costco Wholesale (cost 2.83%). Should you add it to your portfolio today?
1. Pfizer Inc
Pfizer is making tons of cash, largely due to revenue from the COVID-19 vaccine. This year, the company estimates it will generate nearly $100 billion in revenue from all of its products. For this reason, the company expects to report an adjusted earnings per share of at least $6.25. That’s plenty of room to cover its earnings, which are $1.40 per share over a full year.
From a cash flow perspective, the business also looks very solid. Last year, Pfizer generated about $30 billion in free cash flow, and its dividend payments this year will be about $8.8 billion. Even a sharp drop in cash flow – which is unlikely – would leave plenty of room for the company to distribute money to shareholders.
Even better, the boost from COVID-19 may last longer than this year, as the company recently secured a new US government order for an additional 105 million doses of vaccine in the fall. There is an option to increase that to 300 million doses.
There have also been signs that Paxlovid, the company’s COVID-19 pill, could be effective in treating “prolonged COVID,” symptoms that persist even after a person recovers from COVID-19. This is still an untapped opportunity for the healthcare company.
While some investors may dismiss Pfizer as an expensive stock that lives off a COVID-19 revenue boost that won’t last, the company will likely generate solid revenue from a COVID-19 vaccine for the foreseeable future. There is still an ongoing need for vaccinations and booster shots.
Finally, as a result of Pfizer’s strong financials and strong future, its 3.1% dividend yield looks incredibly safe and is a great choice for income investors.
Costco’s dividend yield of 0.7% isn’t terribly exciting — the Standard & Poor’s 500 It offers a return of 1.7%. However, the company still offers an attractive income investment.
The big box retailer is not only raising its dividend payments, but has also paid special dividends in the past. Although regular dividend payments are technically discretionary, most companies follow a schedule for paying them, almost creating expectations for investors.
Through special dividend payments, the company can offer investors a significant cash injection if they feel the business has done particularly well. In 2020, amid a boom in pandemic-induced buying that led to incredible growth numbers for the retail giant, Costco paid out a cash dividend of $10 per share.
Without this special payment, the company’s earnings per share in 2020 would have been just $2.75, so investors received a massive boost. Costco also paid special dividends in 2017, 2015 and 2012.
The company has also doubled its quarterly dividend payments in six years – from $0.45 per share in 2016 to $0.90 now. And despite all this growth, there is still plenty of room for the retail giant’s earnings for further increases in the future. Today, its payout is less than 30% of income, and its free cash flow over the past 12 months is $4.1 billion — nearly three times the $1.4 billion it paid out in dividends.
In May, the company announced third-quarter numbers. Sales for the period ended May 8 were up 16% year over year to $52.6 billion. Profits rose 11% to $1.4 billion. Its continued growth, despite inflation, is impressive and reminds investors why this can be a solid stock to own in the long term.
The only negative thing about Costco stock is its valuation – it’s trading at more than 36 times its future earnings, which is more than double Standard & Poor’s 500average 17. At a time when many retail stocks are struggling, now might not be the best time to buy Costco stock.
It’s best for investors to put the stock on their watch list for now. Its yield is impressive, but it is difficult to justify such an exorbitant premium for it.
David Jagelsky has no position in any of the stocks mentioned. Motley Fool has positions at Costco Wholesale and recommends. Motley Fool has a disclosure policy.