A good incentive for buying a strong dividend stock that’s underperforming is that you can secure a higher yield. As long as the business’s fundamentals remain sound, you can benefit from the better-than-usual payout as well as from the potential capital appreciation it generates if the stock rebounds and rises in value.

Two relatively cheap healthcare stocks offering above-average yields and that are trading near their 52-week lows are Pfizer (PFE) and AbbVie (ABBV). Here’s why you should consider investing in them today.

1. Pfizer
In the past year, shares of Pfizer fell 14%, which is worse than the S&P 500 (down around 7%). Investors are bearish on the healthcare company’s prospects as it looks to try and offset the inevitable decline in COVID-19-related revenue. While its vaccine (Comirnaty) and medication (Paxlovid) will still generate revenue for the business this year, the drop-off is enough for Pfizer to project that its total revenue will drop by around 30% this year, to no more than $71 billion (sales topped $100 billion in 2022).

But even at around $71 billion, that’s far higher than the revenue Pfizer generated before the pandemic, and before it spun off its Upjohn business (which happened in late 2020). In 2019, for instance, revenue was less than $52 billion. Plus, Pfizer made multiple acquisitions to help expand its business. The company projects that by 2030, it will add $25 billion to its top line through the help of its pipeline and acquisitions. Nonetheless, investors remain bearish on the healthcare stock, which today trades just a few dollars above its 52-week low of $41.45 a share.

But for income investors, there isn’t a serious concern about the dividend. This year, Pfizer expects its adjusted diluted earnings per share to be at least $3.25 — nearly double the $1.64 it pays in dividends over the course of a full year. The stock yields 3.7% right now, a full 2 percentage points higher than the S&P 500 average of 1.6%.

Pfizer stock is trading at just 13 times its future earnings (the average healthcare stock trades at a multiple of 17). If you’re looking for a solid income stock to own, this one could make for an underrated buy.

2. AbbVie
Another stock investors are not enthused about these days is AbbVie. The company’s top-selling rheumatoid arthritis drug Humira is losing a level of patent protection, and this year, its sales could nosedive by as much as 37% due to rising competition from newly introduced biosimilars. That’s a potentially huge hit for a product that represents such a big part of the business. During the last three months of 2022, Humira’s sales totaled $5.6 billion, accounting for nearly 37% of the company’s total net revenue of $15.1 billion.

But AbbVie management has said it isn’t too concerned, as it believes the combination of two promising immunology drugs, Rinvoq and Skyrizi, can make up for the shortfall in the long haul. And even though the company is expecting a challenging year in 2023 with the potential drop in Humira’s sales, it’s projecting that its adjusted diluted earnings per share will be at least $10.70. That total is 81% higher than its dividend payments, which total $5.92 for a full year.

As is the case with Pfizer, AbbVie is facing some headwinds, but they shouldn’t affect its ability to pay dividends. And with a yield of 3.9%, AbbVie offers its investors an even higher return than Pfizer. The stock price recently rallied but it remains near its 52-week low of $134.09. Its forward price-to-earnings multiple of 13 is also in line with Pfizer’s. Picking up one or even both of these stocks can be a great move for investors in the long run.

— David Jagielski

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Source: The Motley Fool