Better Dividend Stock to Buy and Hold: Pfizer or Bristol Myers Squibb?

Pfizer (NYSE: PFE) and Bristol Myers Squibb (NYSE: BMY) share much in common. They're both big drugmakers. They both face patent cliffs. Both pharma stocks are up by double-digit percentages this year.

Another key common denominator for these two stocks is that both Pfizer and Bristol Myers Squibb are favorites for income investors. But which is the better dividend stock to buy and hold?

Image source: Getty Images.

Which dividend is more appealing?

Pfizer's forward dividend yield of 5.8% ranks among the highest in the S&P 500 (SNPINDEX:^GSPC). You can count the number of healthcare stocks with higher yields than Pfizer on one hand -- and not use all your fingers.

Bristol Myers Squibb also offers an attractive dividend yield of around 4.3%. Unlike Pfizer, Bristol is still increasing its dividend. The company has increased its dividend for 17 consecutive years and has paid a dividend for 94 consecutive years.

The biggest knock against Pfizer's dividend is that the drugmaker's payout ratio has exceeded 100% in recent quarters, based on GAAP earnings. Meanwhile, Bristol Myers Squibb has maintained a much more comforting payout ratio. Its dividend payments are currently around 55% of earnings.

To be sure, Pfizer continues to generate sufficient free cash flow to fund its dividends. Management has also adamantly stated that the dividend will not be cut. However, Bristol Myers Squibb's dividend appears to be safer than Pfizer's at this point.

Which drugmaker has stronger growth prospects?

Income investors focus most heavily on a company's dividend. However, they also like for the stocks in their portfolios to deliver at least some growth. How do Pfizer and Bristol Myers Squibb compare on this front?

As mentioned earlier, both drugmakers face patent cliffs. The two companies co-market blood thinner Eliquis and will be hit hard when the drug faces U.S. generic competition in 2028. Pfizer has other blockbusters losing patent exclusivity over the next few years as well, including Ibrance and Xtandi. Bristol Myers Squibb will also lose patent exclusivity for its cancer immunotherapy Opdivo within the next two years.

The good news for Bristol Myers Squibb, though, is that it has already crossed a critical inflection point. The company's growth portfolio is now driving its revenue, while the contribution from its legacy portfolio (which includes Eliquis) declines.

Pfizer's story is encouraging, too. The drugmaker projects high single-digit revenue growth after 2028. Its pipeline features several promising candidates, including weight-loss drug berobenatide.

Better dividend stock?

For investors seeking to maximize their income, I think that Pfizer is the better choice between these two stocks. The company's yield is much higher than Bristol Myers Squibb's and will probably remain higher, in my opinion.

Although Bristol's dividend appears safer, I expect Pfizer to avoid cutting its dividend. Pfizer CEO Albert Bourla wouldn't go on record as loudly defending his company's ability to maintain the dividend at current levels if he had any qualms. I also think that Pfizer's newer products and late-stage pipeline candidates will help offset the negative impacts of losses of exclusivity and generate enough free cash flow to fund the dividend.

That said, Pfizer does face more executional risk than Bristol Myers Squibb. I wouldn't be surprised if Bristol Myers Squibb's stock outperforms Pfizer over the next few years. Pfizer will likely provide higher income, but Bristol could deliver a higher total return.

Importantly, the original question was framed as which dividend stock is better to buy and hold. My view is that buying and holding either Pfizer or Bristol Myers Squibb will pay off over the long run. Perhaps the best approach for income investors is to own both stocks.

Keith Speights has positions in Bristol Myers Squibb and Pfizer. The Motley Fool has positions in and recommends Bristol Myers Squibb and Pfizer. The Motley Fool has a disclosure policy.