Why Pfizer Might Be the Most Underrated Dividend Stock to Buy Right Now

Pfizer (NYSE:PFE) has been a reliable healthcare company to invest in for decades, also providing shareholders with some terrific dividend income along the way. Nowadays, however, it's struggling to attract any investors at all.

While its shares are up over 10% this year, over the past five years, they're still down 35%. Worries about its future growth and the safety of the payout are keeping investors away. Here's why I think that's a mistake, and why it may just be the most underrated dividend stock out there today.

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The stock's 6.2% yield is not as risky as it appears

Many investors may scoff at stocks that have high yields, out of fear that they simply are too good to be true, and that a cut could be due. But that isn't always the case. In fact, there can be low and modest-yielding stocks that can be riskier. Yield is not always indicative of risk.

What matters are the underlying earnings and cash flow numbers. Pfizer's free cash flow has totaled $11 billion over the past four quarters, which is over $1 billion more than what it has paid in dividends during that time frame.

The healthcare company has been incurring losses recently, but that has been largely the result of writedowns and non-cash expenses. Its adjusted per-share earnings in its most recent quarter came in at $0.77, which is higher than the rate of its quarterly dividend ($0.43). Thus, its 6.2% yield doesn’t look all that risky.

Pfizer has been focusing on making its business leaner, and restructuring expenses have weighed on its financials. But ultimately, it should come out with better margins and strong profits.

Pfizer's low valuation compensates investors for uncertainty ahead

Due to the steep sell-off in recent years, Pfizer's stock is looking incredibly undervalued right now. It's trading at a forward price-to-earnings multiple of just 10. That's based on analyst expectations for future earnings. That's far lower than the S&P 500 average of 20.

The company is facing patent cliffs on some of its top drugs, but it has also been investing in its future growth and expanding its pipeline of drug candidates. Currently, it has 95 candidates. Even if not all of them succeed, a few solid ones could reenergize growth and alleviate concerns about the stock.

Pfizer is a stock that looks well overdue for a rally. Although it's been rising this year, it can still have much more to rise. At a low valuation and with an incredibly high dividend yield, it's one of the best stocks to buy right now.

David Jagielski, CPA 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.