What Higher Interest Rates Mean for Dividend Stocks Like AbbVie and Pfizer

The pharmaceutical business is capital-intensive at certain stages, but once a pharma company achieves success with a drug, it can become quite the cash generator. The U.S. pharmaceutical sector has numerous companies like this, and with the strong cash flow they generate, they reliably pay generous dividends.

Two of these creatures are Pfizer (NYSE: PFE) and AbbVie (NYSE: ABBV). But in an environment of rising interest rates, the payouts that distinguish them from peer stocks might be more of a hindrance than a help. Here's why.

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The yield factor

The most trusted borrower in the world is the U.S. government, as it issues mountains of debt and has never defaulted on any of it. As a result, its 10-year Treasury note (T-note) is considered to be the global benchmark bond, given the considerable financial strength and consistency of its issuer.

Because of this, it's the one bond against which other debt instruments are compared. Its yield is used not only to compare returns on debt but also other types of returns, such as dividends.

All things being equal, a dividend-paying stock's yield should at least be somewhat competitive with current bond yields. For many investors, a choice income stock marries an attractive yield with an underlying business that can still produce growth.

The single largest influence on bonds is the federal funds target rate (actually, a range) set by the U.S. Federal Reserve. Generally speaking, higher rates translate to higher yields.

Following a series of cuts by the Fed in 2024 and 2025, last month it enacted a widely expected increase (of 25 basis points). This was, of course, an attempt to cool inflation, which remains persistent and could very well continue to be.

Rising rates

That's why numerous economists and analysts expect further Fed rate hikes in the coming months. When and if that happens, many investors will cast an increasingly wary eye on the dividend yields of businesses like Pfizer and AbbVie.

Again, the difference between a static yield-producing instrument like a T-note and a productive business is considerable, so dividend yield isn't a be-all and end-all. The takeaway here is that said business needs to genuinely be productive, i.e., grow, for any yield gap to be insignificant.

I'd say Pfizer isn't at this stage now, while AbbVie is. Pfizer has several top products approaching the dreaded patent cliff and has largely addressed this by making acquisitions and beefing up its development program. While it's essentially in this reset mode, the trajectory of its fundamentals hasn't been impressive; many investors are probably hanging on for that chunky yield, which is currently 5.7%.

AbbVie, with a dividend yield of 2.4%, is a different story. One reason for that comparatively far lower yield is the popularity of its stock. This, in turn, is largely due to the emergence of two blockbuster drugs (Skyrizi and Rinvoq) making up for the loss of exclusivity for another, Humira. Sales of other products in the portfolio are growing robustly, as are the company's overall fundamentals.

Ultimately, then, I think rising rates will put more pressure on Pfizer's stock than AbbVie's. I'm actually bullish on both. I would predict, though, that the former's turnaround will be slow, so it might be a suitable buy only for long-term-focused investors.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie and Pfizer. The Motley Fool has a disclosure policy.