Dividend stocks offer attractive features for income and growth investors alike. On the income side, many blue chip dividend stocks sport higher yields than those of risk-free assets such as the 10-year Treasury bill, and their payouts also appear safe and dependable, as corporate cash positions are at near-record levels in many instances. Dividend stocks can also boost returns through compounding when the distribution of cash or shares is reinvested. According to a recent report by Hartford Funds, reinvested dividends accounted for 69% of the total returns of the benchmark S&P 500 index over the past 62 years.
Pfizer (PFE -0.52%) and British American Tobacco (BTI -2.29%) (aka BAT) are blue chip dividend stocks that command attention for two reasons. First off, both sport yields that are several times higher than the 1.5% average for S&P 500 stocks. Pfizer and BTI thus provide particularly generous income streams for shareholders. Second, each company is known for its ability to generate ample free cash flows, which bodes well for the sustainability of its payouts and the prospect of future distribution hikes.
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But which of these blue chip dividend stocks is the better buy now?
The case for Pfizer
Pfizer has the highest dividend yield of any big pharma stock -- 6.2% at the current share price. Its shares are also cheap, trading at 9.4 times 2024 estimated earnings. But due to falling demand for its COVID-19 products, Pfizer's revenue is on pace to decline by more than 40% this year, and it faces the prospect of little to no revenue growth next year, according to a recent corporate update. The drugmaker hopes to overcome this challenge by bringing new internally developed drugs to market and by acquiring biopharmas with commercial-stage assets, such as Seagen. However, these strategies will take time to pay off.
Still, Pfizer's dividend should be safe given the company's strong free cash flows and management's commitment to paying a top-tier cash distribution. However, the stock probably won't offer much in the way of capital appreciation until management's turnaround plan starts to bear fruit. That's fine if you plan to hold the stock for five to 10 years. But buying this big pharma stock if you have a shorter time horizon in mind for the investment may not be a winning strategy.
The case for British American Tobacco
British American Tobacco is one of the largest tobacco companies in the world in terms of annual sales. At its current share price, it offers a blistering 9.4% yield. BAT's stock is also exceptionally cheap at 6.28 times 2024 projected earnings. However, the tobacco company's sizable yield and low-ball valuation reflect some important headwinds.
Chief among them is the ongoing decline in cigarette smoking rates around the world. Now, British American Tobacco is transforming its business to mitigate this headwind by pivoting to vaping and heated tobacco alternatives. But this metamorphosis is likely to take a few years to complete.
Verdict
Despite its recent problems, Pfizer is arguably the better dividend play than British American Tobacco right now. Pfizer has the clear advantage of operating in a high-growth sector, whereas the tobacco industry is in rapid decline. That doesn't mean that BAT's plan to move beyond traditional cigarettes won't pan out, but it has a tougher road ahead of it than Pfizer does. Pfizer, for its part, simply needs to execute its growth strategy to return to form before the close of the decade.
