The Smartest Dividend Stock to Buy With $1,000 Right Now

Key Points

• The drug industry is facing scrutiny from investors because of changes in Washington and among consumers.

• Drug companies are also facing the issue of patent cliffs, even though this is a normal part of the business.

• One of the drug makers below has a long history of supporting its dividend through hard times.

• 10 stocks we like better than Merck ›

The winds of political change have hit the healthcare industry, with drug makers seemingly taking the brunt of the gale. Industry-leading companies like Pfizer (NYSE: PFE), Merck (NYSE: MRK), and Bristol Myers Squibb (NYSE: BMY) have seen their stocks fall and their yields rise.

The pharmaceutical niche is an attractive place for contrarian investors to start looking for stocks to buy. If you have $1,000, here's one pharma stock that seems to stand out from the pack.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

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What do drug makers do?

From a big picture perspective, pharmaceutical companies like Pfizer, Merck, and Bristol Myers Squibb all do very similar things. They conduct research to find potential drugs, they develop those drugs, they get those drugs approved for human use, and then they sell those drugs to consumers. This is a vast simplification of a very complicated, time-consuming, and expensive process.

Because of the difficulty of finding new drugs and the importance of new drug development in the healthcare industry, pharma companies are given a short exclusive right to sell newly developed drugs. That said, when the patent for a drug ends, competition can come in and make generic versions of the drug. This normally results in a material drop in sales for the company that developed the drug, which is called a patent cliff. Dealing with patent cliffs is normal for drug makers.

Dealing with the government is also normal, though right now the mood in Washington D.C. is a bit more negative on the drug sector. That's particularly true of vaccine makers. The negative mood has spilled over to consumers, as well. Although this is a bit of an unusual pressure in some regard, it is one that most pharma companies are dealing with so it is not a particularly unique headwind to any one company.

PFE data by YCharts

What's attractive about Pfizer, Merck, and Bristol Myers Squibb?

Pfizer, Merck, and Bristol Myers Squibb are some of the oldest and best known drug makers in the world. They are used to dealing with patent cliffs, the government, and the heavy and uncertain lift of research and development. It is highly likely that all three muddle through the current industry downturn. All three have fallen dramatically from their recent highs, however, with Pfizer off 60% and Merck and Bristol Myers Squibb off roughly 40% each. That's pushed their dividend yields up to attractive levels.

So dividend lovers will probably be attracted to all three of these drug stocks. But if you are going to take a contrarian stance and buy one of these stocks, which one should it be? If you are looking for dividends, dividend history is a good starting place. And Pfizer is quickly knocked out of the running because of a dividend cut in 2009. That cut came about because of the $68 billion acquisition of Wyeth, so it wasn't all negative.

PFE Dividend data by YCharts

Still, if you want consistent dividends, Merck and Bristol Myers Squibb simply have more consistent track records. That leaves Merck and Bristol Myers Squibb to consider. Dividend investors will probably find Bristol Myers Squibb's 5.3% yield much more attractive than Merck's 4% yield. That's completely reasonable, but from a valuation standpoint, Merck looks more attractive.

Merck's price-to-sales (P/S), price-to-earnings (P/E), and price-to-book value (P/B) ratios are all notably below their five-year averages. Bristol Myers Squibb's P/S ratio is below its five-year average, red ink on the bottom line in recent years makes the P/E difficult to assess since a five-year average isn't meaningful, and the P/B ratio is above the longer-term average. With regard to P/E, Merck's current P/E is lower than Bristol Myers Squibb's current P/E, further hinting that Merck is the better value.

All in, Merck should probably be your first stop if you are researching out-of-favor drug makers.

Merck has warts

When it comes to high-yield Pfizer, Bristol Myers Squibb, and Merck, Merck is probably best described as the cleanest dirty shirt. For example, Merck has a material patent cliff coming up with key drug Keytruda, though there are factors that will likely mitigate the hit. For example, international patents extend into the 2030s and a different delivery method holds a patent until nearly 2040. Another worry is the slow uptake of the company's HPV vaccine in key markets.

Basically, Merck isn't any more of a slam dunk than Pfizer or Bristol Myers Squibb. If you buy the stock, you'll need to believe that Merck will muddle through its current headwinds as deftly as it has historically navigated hard times. However, if you can get your head around the business, and are willing to keep a close eye on company developments, $1,000 will get you roughly 12 shares of this historically reliable dividend payer while it has a lofty yield and attractive valuation.

Should you invest $1,000 in Merck right now?

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, Merck, and Pfizer. The Motley Fool has a disclosure policy.