Better High-Yield Dividend Stock: Pfizer or Novo Nordisk?

Dividend investors are usually drawn like moths to high-yield stocks. That makes total sense, but a string of recent dividend cuts announced by companies like Conagra (NYSE: CAG) and Campbell's (NASDAQ: CPB) in the historically resilient consumer staples sector should leave dividend lovers on edge.

In the pharmaceutical space, another sector known for resilience, two of the highest-yielding stocks are Pfizer (NYSE: PFE) and Novo Nordisk (NYSE: NVO), with yields of 6% and 4.7%, respectively. Which one is the better choice?

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The traditional metrics favor Novo Nordisk

One of the first things that dividend investors look at when assessing dividend safety is the payout ratio. Novo Nordisk's payout ratio is a very comfortable 33%. Pfizer's payout ratio is a very worrying 220%. But the payout ratio compares a company's dividend to its earnings. Dividends are paid from cash flows, with the financial impact reflected on the cash flow statement. So the cash dividend payout ratio can provide a more accurate view of a company's dividend-paying ability.

Novo Nordisk's cash dividend payout ratio is 110%. Pfizer's cash dividend payout ratio is roughly 90%. That flips the script, though at 90%, it would be hard to suggest that Pfizer's dividend safety is particularly strong. In fact, the real takeaway is that dividend investors are taking on material risk by investing in either of these pharmaceutical stocks.

Novo Nordisk lacks Pfizer's diversification

Novo Nordisk is actually at the leading edge of a new market in the drug sector, as it was the first to introduce a GLP-1 weight-loss shot and pill. That's the good news. The bad news is that it quickly lost its GLP-1 lead to rival Eli Lilly (NYSE: LLY), due to both self-inflicted wounds (Novo couldn't keep up with early demand) and normal industry dynamics (Eli Lilly's GLP-1 shot was more effective).

So, even though Novo Nordisk is at the cutting edge, it isn't executing particularly well right now. In fact, it is even shifting its model to focus on volume, which is pressuring short-term profits. Investors are downbeat. But the longer-term problem is potentially more concerning, as Novo Nordisk doesn't have a particularly diverse drug portfolio. If it can't develop new drugs, patent expirations on its GLP-1 drugs could be particularly painful. Investors are in a show-me mood, which is why the stock is so depressed and the yield is so high.

Pfizer's story isn't actually much better. It is facing a number of large patent expiries, and its pipeline hasn't produced any major new winners to replace the lost revenue. In fact, an internally developed GLP-1 drug flamed out, which was a major black eye for the highly respected healthcare company. Patent expirations follow a schedule, but research and development doesn't, so a mismatch isn't actually an odd occurrence in the drug space.

What's different about Pfizer compared to Novo Nordisk is that Pfizer has a much broader product portfolio and a long history of successful drug development. Given enough time, it is highly likely that Pfizer will either develop or acquire exciting new products. In fact, after its own GLP-1 drug was dropped, the company quickly bought a company with a more compelling GLP-1 candidate. Notably, Pfizer has stated that it intends to back its dividend while it works through the new drug development process.

Neither dividend is 100% safe, but Pfizer may be better

When you step back and look at the big picture, dividend investors have very real reasons to worry about Novo Nordisk and Pfizer. Both are highly likely to survive their current headwinds; however, Novo Nordisk is undertaking a more material business shift than Pfizer, which is essentially operating the same way it always has. The amount of cash flow Novo Nordisk needs to divert to its drug development efforts may be particularly large. When balancing risk versus reward, Pfizer's higher yield may actually be the more attractive option.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly, Novo Nordisk, and Pfizer. The Motley Fool recommends Campbell's. The Motley Fool has a disclosure policy.