Pfizer Inc. (PFE), Walgreen Company (WAG): A New Dividend Growth Stock

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A new position

The Ultimate Dividend Growth Portfolio received about $600 in dividend payments in the month of June, and I’ve used those proceeds to open a new position in Pfizer Inc. (NYSE:PFE). I recently wrote about Pfizer Inc. (NYSE:PFE) in an article entitled Big Things Are Happening At This Pharmaceutical Company, and my reason for adding Pfizer Inc. (NYSE:PFE) is two-fold.

Like many companies, Pfizer Inc. (NYSE:PFE) was forced to cut its dividend in 2009 due to the financial crisis. The dividend is still well below its peak even though the company is more profitable than it was five years ago, leading to a low payout ratio. In 2012 the dividend only accounted for about 42% of the free cash flow, leaving plenty of room for growth. The current yield is high at 3.42%, meaning that dividend growth can be in the mid-to-high single digits and still be sufficient.

The second reason I’m adding Pfizer Inc. (NYSE:PFE) is the company’s renewed focus on its core business. Pfizer Inc. (NYSE:PFE) sold its infant nutrition business to Nestle last year and spun off its animal health business, Zoetis, in February. Cash generated from these deals are being used for aggressive share buybacks, which have the effect of lowering the payout ratio even further.

With cash from these deals in addition to a robust free cash flow Pfizer can drive the dividend higher while keeping the payout ratio in check through buybacks. Earnings growth can, and likely will, be slow, but I still expect the dividend to grow in the high-single-digits going forward. The last increase was about 9%, and I expect that type of increase to be the norm.

I’ll add 21 shares of Pfizer to the portfolio. This is by far the smallest position, but I hope to add to it as more dividend payments come rolling in. The portfolio now has a yield on cost of 3.41%, and its value has increased by 5.37% since inception. Pfizer makes a great addition to the portfolio, and I expect to see exceptional dividend growth going forward.

The article A New Dividend Growth Stock originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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