3 Dividend-Paying Drug Stocks to Buy at a Discount

The S&P 500 index was recently offering a tiny dividend yield of 1.2%. You can get as much as 7% from some of the world's largest drugmakers. But sometimes, a high yield is a sign of risk.

What does the risk-return profile look like for iconic pharmaceutical giants Pfizer (NYSE: PFE), Bristol Myers Squibb (NYSE: BMY), and Merck (NYSE: MRK)? Working from highest yield to lowest, here's a quick look.

1. Pfizer has a 7% yield and is making big moves

Pfizer has increased its dividend annually for 15 years. The current dividend yield is roughly 7%, which is well above the market's yield and the 1.1% yield of the average pharmaceutical company. The big worry among investors with Pfizer is likely the trailing-12-month dividend payout ratio of 90% -- that and the fact that Pfizer cut its dividend when it acquired Wyeth in 2009 for $68 billion.

That's important because Pfizer recently announced plans to acquire Metsera for $4.9 billion (plus potential earnouts) to bolster its drug pipeline. It's a smaller deal than Wyeth was. But even if all of the earnouts are triggered (adding another $22.50 to the upfront price of $47.50 per share), the high dividend payout ratio here increases the risk that the board resets the dividend lower.

The Metsera deal does show that Pfizer is doing what it needs to do to ensure it survives and thrives over the long term. Still, it's probably best to look at Pfizer as a value or turnaround play rather than a high-yield stock. On the valuation front, its price-to-sales (P/S), price-to-earnings (P/E), and price-to-book (P/B) ratios are all below their five-year averages. If the dividend holds, it will be icing on the cake.

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2. Bristol Myers Squibb yields 5.6% and it's buy, buy, buying

One of the issues Pfizer is trying to avoid is a patent cliff, which is when older drugs lose patent protection, making revenue fall. The hope is that new drugs can be brought to market before that happens (or at least shortly thereafter). All major drugmakers have to deal with this, including 5.6%-yielding Bristol Myers Squibb. Although the company has 19 years of annual dividend increases behind it, its payout ratio is an even higher 99% right now.

But BMS has been particularly active on the acquisition front. In 2024 it bought oncology-focused Mirati Therapeutics and RayzeBio; it also added neurology-focused Karuna Therapeutics to the fold. Basically, the company has bulked up its drug pipeline, and that should help carry it through upcoming patent losses (which start next year), even though the exact timing of new products may not line up as perfectly as hoped.

From a valuation perspective, only the price-to-sales ratio is below its five-year average. The P/E isn't overly useful because recent losses mean there's no five-year average. And the P/B ratio is above the longer-term average. As with Pfizer there's some risk of a dividend cut here, but unlike Pfizer, Bristol Myers Squibb doesn't have a dividend cut in its history over the past three decades. If history is any guide, the dividend is more likely to be held steady for a spell than it is to be cut.

3. Merck has a 3.7% yield and a reasonable payout ratio

Merck is dealing with the same basic issues as both Pfizer and Bristol Myers Squibb -- they're all drug companies, after all. But there's an important difference. Merck's 3.7% yield is lower and a reflection of a more attractive risk-reward profile. Specifically, Merck's dividend payout ratio is fairly reasonable at around 50%. There's a lot more room for adversity here.

On the valuation front, Merck's P/S, P/E, and P/B ratios are all below their five-year averages. To be fair, 2029 and 2030 are likely to see patent cliffs, but Merck has a solid pipeline that should start to kick in pretty quickly thereafter. And it has some opportunities to protect its most important patent, Keytruda, for a little longer, using international patents and different delivery methods. So the hit could be less of a concern than it seems. The lower yield here is an indication that the risk-reward profile is not nearly as worrisome.

All three will survive, but the investment risks are different

It is highly unlikely that Pfizer, Bristol Myers Squibb, or Merck will suddenly go out of business. The worst-case scenario for dividend investors in each case is likely a dividend cut. But if you're trying to live off of your dividend income, that could be a pretty big risk.

Pfizer, with the highest yield, comes with the most risk given its dividend history. Bristol Myers Squibb falls in the middle. With Merck it looks like there's little to no risk of a cut, but you'll also have to accept a fairly low yield compared to the other two drug stocks. In the end, that might be the best option for risk-averse dividend investors looking for a discounted drug stock.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, Merck, and Pfizer. The Motley Fool has a disclosure policy.