Should You Buy Bristol Myers Stock for Its 5.4%-Yielding Dividend?

A high-yielding dividend stock can make for a great asset in your portfolio. It can generate income on a recurring basis, providing you with some cash to pay bills, or you can reinvest the dividend to help boost your gains from the stock. Dividend stocks can sometimes make for relatively safe investments to hold during times of turmoil.

One particularly appealing dividend stock right now is Bristol Myers Squibb (NYSE: BMY). It yields 5.4%, which is an astronomical payout when compared to the S&P 500 average of just 1.2%. The big question for investors, however, is whether the pharma company's dividend is really safe, as the stock hasn't been doing well. Here's a closer look.

Image source: Getty Images.

A falling share price has pushed the pharma stock's yield up

Over the past five years, Bristol Myers' total return (which include dividends) is negative 9%. That means that investors who owned the stock, even with the dividend income, would be in the red. Meanwhile, if you had simply mirrored the S&P 500 through an index fund, you'd have roughly doubled your money when including the payout.

Investors haven't been thrilled with the lack of growth from the business in recent years, along with concerns about its future. This year, Bristol Myers anticipates its revenue to be between $47.5 billion and $48 billion, which would suggest a slight decline from the $48.3 billion it reported last year. But its numbers may look even worse in the future as it faces patent cliffs on multiple drugs in the coming years.

How safe is the dividend?

Although Bristol Myers isn't generating significant growth, it's a profitable business overall. Based on its earnings, the company's payout ratio is around 84%. That's a bit high for a dividend stock, but it's nonetheless sustainable. Bristol Myers has also generated $15.3 billion in free cash flow over the trailing 12 months, which is more than the $5 billion it paid in dividends over that time frame.

The payout looks safe today, but whether it will remain that way in the long run may be weighing on investors' minds. The company has a whopping $32 billion in net debt. While that's down from $38.5 billion at the start of the year, it's an albatross that investors can't look past. It calls into question the safety of the dividend in the future.

Is Bristol Myers stock worth investing in today?

Bristol Myers is an intriguing company right now. While it's investing in its growth and has around 50 compounds in development, there are still valid concerns about how the business will perform in the future. It is facing patent expirations in the coming years for multiple drugs, including Opdivo and Eliquis, which could significantly weigh down its top line in the near future.

This creates an element of risk that I'm not comfortable with, when also taking into account its high debt load and growth challenges. While the stock looks cheap, trading at a forward price-to-earnings multiple (P/E) (which is based on analyst estimates) of less than 8, it looks more like a value trap than a good buy right now.

The dividend may look safe today but may be at risk in the future, as the stock's payout ratio is already creeping up. If the company's financials deteriorate in the years ahead, as they might due to patent losses, it may only be a matter of time before management opts to cut back on the dividend in order to preserve cash.

I'd take a wait-and-see approach with this stock. If you're craving dividends, there are far safer income-generating stocks to own today than Bristol Myers.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.