A Game-Changer For Pfizer Inc. (PFE)

3 Drug Launches You Need to Know in 2013: Pfizer, NPS Pharma, Ariad PharmaThe wealth-building power of compound interest will never cease to amaze me. It’s a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don’t always deliver the fattest share-price returns.

Biopharma giant Pfizer Inc. (NYSE:PFE) just reported a disappointing first quarter. Pfizer Inc. (NYSE:PFE) share prices fell as much as 4.8% on a generally flat market day, making the stock the worst performer on the Dow Jones Industrial Average (Dow Jones Indices:.DJI) today — by a long shot. The company missed Wall Street’s revenue and earnings targets as key products started falling out of patent protection

But Pfizer Inc. (NYSE:PFE)’s stock still trades less than 6% below recently set all-time highs, and management boosted dividend payments by 9% last quarter. The shares offer a meaty 3.3% dividend yield, even at these skyrocketing prices. And that dividend muscle is what turns Pfizer Inc. (NYSE:PFE)’s proven cash machine into a market-crushing investment vehicle.

PFE Dividend Chart

PFE Dividend data by YCharts.

Reinvesting Pfizer’s dividends is a winning strategy. That way, you put some serious distance between dividend-adjusted returns and the Dow’s gains. Pfizer even beats the total return of fellow Dow member Merck & Co., Inc. (NYSE:MRK).

And here’s why: Pfizer Inc. (NYSE:PFE) did slash dividend payouts in response to the 2008 and 2009 global economic crisis, but it has boosted its policy every year since then. Merck & Co., Inc. (NYSE:MRK) has provided just two dividend boosts in the last four years. All told, Pfizer’s payouts have jumped 50% since the post-crisis rock bottom, while Merck’s only gained 13%.

Not only that, but Pfizer Inc. (NYSE:PFE)’s dividends still have more room to grow than Merck & Co., Inc. (NYSE:MRK)’s. Both companies pocket a generous share of their free cash flows, but Pfizer uses a smaller portion of its cash for dividend payments. And unlike Merck’s, Pfizer’s cash funding never dried out, even at the height of that old crisis.

PFE Cash Div. Payout Ratio TTM Chart

PFE Cash Div. Payout Ratio TTM data by YCharts.

These are the details that make income investors sleep soundly at night with some Pfizer Inc. (NYSE:PFE) stock under their pillows. Don’t let one disappointing quarter scare you away from this hulking generator and sharer of cash.

The article How Dividends Change the Game for Owners of Pfizer Stock originally appeared on Fool.com and is written by Anders Bylund.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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