Dividend stocks can be a port in the storm. Thanks to powerful wealth-building vehicles like dividend reinvestment plans, these stocks can take advantage of the power of both dollar-cost averaging and compounding. However, not all dividend stocks are great buys. Companies with unusually high yields can be particularly risky for a variety of reasons.
Which high-yield dividend stocks stand out as top buys right now? Pharmaceutical giant Takeda Pharmaceutical (TAK) and telecom stalwart AT&T (T) both screen as attractive buys at current levels. Read on to find out more about these two elite dividend stocks.
Takeda Pharmaceutical: A 4.4% annualized dividend yield
Takeda Pharmaceutical is a global leader in the pharmaceutical industry, with a diversified portfolio of drugs and vaccines. The company has a strong presence in Japan, the U.S., Europe, and emerging markets. Takeda focuses on four therapeutic areas: oncology, rare diseases, neuroscience, and gastroenterology. The company also has a robust pipeline of experimental drugs and vaccines, with over 50 candidates in ongoing clinical trials.
Takeda pays a generous dividend of 4.4%, which is well above the average of 2.3% for the healthcare sector. The company has a payout ratio of approximately 49%, indicating it should have ample room to grow its payout in the years to come. Underscoring this point, most big pharma stocks sport payout ratios well north of 50%. Takeda's dividend is supported by an overall improving financial picture. Over the past five years, for instance, the Japanese pharma giant has grown its annual revenue by 18.4%, earnings per share by 15.8%, and free cash flow by 45.5%.
At under 10 times projected earnings, Takeda stock is substantially undervalued compared to its peers. Large-cap pharma stocks, after all, trade at an average earnings multiple of 15.1. Takeda's low valuation reflects a handful of important risks, such as key patent headwinds for top-selling drugs like Vyvanse, along with the company's highly leveraged balance sheet. However, these risks aren't insurmountable and Takeda has done an admirable job of positioning the company for long-term growth. All told, Takeda stock may be worth buying for its attractive valuation, robust pipeline, and above-average dividend yield.
AT&T: A 7.9% annualized yield
AT&T is one of the largest telecommunications companies in the world, with over 222 million wireless subscribers and over 15 million broadband customers. At present, the telecom giant offers shareholders an eye-popping 7.9% annualized yield. However, this sizable yield has largely been the byproduct of AT&T's falling share price. In 2023, the company's shares have plunged by nearly 23% over concerns about its free-cash-flow generation in the back half of the year, potential liability over legacy infrastructure, a high debt load, limited growth prospects, as well as the emergence of low-cost competitors.
On the bright side, this double-digit drop in AT&T's shares has put them firmly in bargain territory. The stock trades at a forward price-to-earnings ratio of 5.8, which is well below the industry average of 12.7. AT&T stock, in turn, has probably bottomed out, making it a great bargain income play at current levels.
That being said, there's the remote risk the telecom company may be on the hook for a large sum stemming from its exposure to antiquated lead-covered cables. AT&T, for its part, has repeatedly downplayed this risk factor, citing the company's continuous efforts to safeguard the public from hazards associated with this ancient infrastructure.
Bottom line: This high-yield telecom stock should be able to deliver outstanding returns over the next five to 10 years, despite this infrastructure overhang.
Originally published on Fool.com