2 Top Dividend Stocks to Buy on the Dip

Key Points

• Pfizer's pipeline in oncology, combined with its cost-cutting initiatives, could help it bounce back.

• Merck could move beyond Keytruda thanks to newer approvals and a novel formulation of the medicine.

• Both companies have increased their dividends at a decent rate over the past five years.

• 10 stocks we like better than Pfizer ›

Dividend stocks are a great investment choice for many reasons. Buying on the dip is even better, provided, of course, they have the means to bounce back.

Investors looking for companies that fit this profile should strongly consider Pfizer (NYSE: PFE) and Merck (NYSE: MRK). These two market leaders have lagged broader equities over the trailing-12-month period, but for those focused on the long game, they still look attractive. Here's the rundown.

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1. Pfizer

Over the past few years, Pfizer has dealt with worsening financial results and stiff competition for some products. It also faces the prospect of losing patent protection for others; these include Eliquis, an anticoagulant that is one of its top-selling drugs, and Xtandi, a cancer treatment. Both will lose their patents in the U.S. within the next few years.

These challenges have led to terrible stock-market performance. However, the sell-off may have gone too far. At current levels, Pfizer's shares look attractive.

One reason the company should bounce back and continue to deliver strong returns over the long run is its deep pipeline, particularly in oncology, one of the largest therapeutic areas in the industry. Pfizer currently has five blockbuster cancer medicines, and plans to raise that number to eight by 2030.

Pfizer has exciting candidates in other areas as well, and in recent years has earned approval for several new products. Though these aren't yet meaningfully contributing to its top-line growth, they should do so eventually as they earn label expansion.

The company's vaccine for respiratory syncytial virus (RSV), Abrysvo, generated $143 million in sales in the second quarter, which isn't bad for a product approved in 2023. It also recently earned a label expansion in Europe for adults age 18 to 59 (it was previously indicated for those 60 and older). Pfizer should make progress with Abrysvo and other newer launches.

The company has also been reducing expenses. These initiatives were likely partly responsible for Pfizer's earnings beat during the second quarter. Management intends to achieve $4.5 billion in net cost savings this year and pursue further reductions in the years ahead, efforts that should help improve profitability.

Pfizer is a solid dividend stock. Its forward yield currently tops 7%, and the company has increased its payouts by 19.5% in the past five years. While the stock may take some time to recover, Pfizer could be an excellent long-term investment for income-seeking investors.

2. Merck

Merck is facing several issues, none more important than increased competition for its best-selling drug, cancer medicine Keytruda, and an upcoming patent cliff in 2028 for the medicine. Also, the company's second-quarter results were not strong: Revenue declined by 2% year over year to $15.8 billion, while adjusted earnings per share declined by 7% to $2.13.

However, there were some bright spots for the company. Most notably, Winrevair -- one of its newest launches, which earned approval last year -- reported sales of $336 million. Winrevair is a therapy for pulmonary arterial hypertension with a new mechanism of action. It should become a blockbuster relatively soon.

Merck's business in animal health -- where it's one of the leaders -- also performed well, with sales from that segment rising by 11% year over year to $1.6 billion in the second quarter.

Meanwhile, Merck has some exciting pipeline candidates that should help it overcome Keytruda-related challenges. One of them is a subcutaneous version of Keytruda, which has already aced phase 3 studies and will help extend the medicine's patent protection. Merck has also significantly improved its pipeline in recent years thanks to licensing agreements. Its candidates include promising cancer products and weight loss medicines.

Just as Winrevair appears to be a major success, Merck is also likely to develop innovative therapies that will mitigate potential Keytruda-related revenue losses. So, despite recent setbacks, the business could bounce back given Merck's history of innovation.

Turning to Merck's dividend program, the company now offers a forward yield of 4.1%, with its dividends increasing by 39% over the past five years. The stock remains a good pick for dividend seekers.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck and Pfizer. The Motley Fool has a disclosure policy.