What Higher Interest Rates Mean for Dividend Stocks Like AbbVie and Pfizer
They definitely matter... up to a point.
Higher interest rates can impact dividend stocks like AbbVie and Pfizer differently. These companies are capital-intensive and generate significant cash flow, allowing them to pay generous dividends. Pfizer (PFE) and AbbVie (ABBV) are two such companies, but rising interest rates may pose a challenge to their payout advantages.
The U.S. government is the most trusted borrower, issuing massive debt with a perfect repayment record. As a result, the U.S. 10-year Treasury note is the global benchmark bond. Its yield is used to compare other debt instruments and returns, including dividends. In general, a dividend-paying stock's yield should be competitive with current bond yields.
The federal funds target rate set by the U.S. Federal Reserve significantly influences bond yields. Higher rates typically translate to higher yields. After reducing rates in 2024 and 2025, the Fed raised them last month by 25 basis points to combat persistent inflation. Many economists and analysts anticipate further Fed rate hikes.
Investors should be wary of the dividend yields of companies like Pfizer and AbbVie if rates continue to rise. The difference between a static yield-producing instrument like a Treasury note and a productive business like Pfizer and AbbVie is significant. Thus, dividend yield isn't the only factor to consider.
Pfizer is currently going through a reset phase, with several top products nearing patent expiry. It has addressed this issue by making acquisitions and expanding its development program. However, Pfizer's fundamentals haven't shown impressive growth, and many investors are holding onto it for its substantial yield of 5.7%.
AbbVie, on the other hand, offers a lower dividend yield of 2.4%. Its popularity is due to blockbuster drugs Skyrizi and Rinvoq, which have regained revenue after losing exclusivity for Humira. Sales of other products in AbbVie's portfolio are also growing, along with the company's overall fundamentals.
Rising rates may put more pressure on Pfizer's stock than AbbVie's due to the latter's robust growth and strong fundamentals. However, both stocks are considered by the author, who is bullish on both but predicts Pfizer's turnaround will be slow, making it a more suitable long-term investment.
Written by urgent.news from Motley Fool's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
