The Most Concerning Thing About Pfizer's Dividend Isn't What You Think

Pfizer (NYSE: PFE) has an attractive 6.1% dividend yield, as of this writing. That compares with roughly a 1% yield for the S&P 500 index (SNPINDEX: ^GSPC) and a 1.4% yield for the average pharmaceutical stock. Investors should probably be worried about Pfizer's shockingly high yield. But you may not be looking at the right metric to gauge how worried you should be.

Where do Pfizer's dividends come from?

Most investors look at the dividend payout ratio when they consider dividend safety. This metric compares dividends to earnings, which is a logical concept. If a company earns more than it pays in dividends, the dividend should be safe. Pfizer's dividend payout ratio is currently above 200%, which is not comforting.

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Which is why it's a good thing that the financial impact of dividends doesn't appear on the earnings statement. It shows up on the cash flow statement. When you compare Pfizer's dividend to its free cash flow using the cash dividend payout ratio, you get around 90%. That's not exactly great, but it is far better than the earnings comparison. Notably, the cash to pay dividends doesn't have to come from earnings; it can come from other sources, such as cash on a company's balance sheet.

Which is why, if you are worried about Pfizer's dividend, you should probably be paying extra attention to the company's cash and short-term investments right now. And there is a material reason to worry. First, the good news: The company ended the second quarter of 2026 with nearly $1 billion in cash and $10.7 billion in short-term investments. Moreover, management continues to voice strong support for the dividend, which costs about $2.5 billion per quarter.

For now, there's no particular reason to believe the dividend is at risk. However, the bad news is that Pfizer is facing several patent expirations, and its pipeline of new drugs isn't producing blockbusters just yet. So research and development spending is likely to be a key priority. R&D spending competes with the pharma giant's dividend for cash.

Watch the right metrics if you own Pfizer

To be fair, Pfizer's elevated payout ratio is a sign of risk. But at the moment, it continues to have sufficient cash flow to cover the payment, as seen with the cash dividend payout ratio. But the real story may boil down to the cash the company has to support both its business and its dividend. With over $11 billion in cash and short-term investments on its balance sheet, Pfizer is fine today. But what should probably concern you most is the competing demands of the business and the dividend on that same pile of cash.

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