The major U.S. stock market indexes are officially in overheated territory thanks to enthusiasm for artificial intelligence (AI). Since the end of 2022, the most popular benchmark, the S&P 500 index, has soared about 51% to a rich valuation that we’ve not seen since right before some severe market crashes.
If we add up earnings from the past 10 years, the average stock in the S&P 500 index is trading at a cyclically adjusted price-to-earnings (CAPE) ratio of about 35.2, which is disturbingly high.
The S&P 500 CAPE ratio has risen above 35 just two other times over the past 40 years: once during the late ’90s internet bubble and again just before the market collapsed in 2022.
An abnormally high P/E ratio for benchmark market indexes doesn’t guarantee a crash is around the corner. Given the S&P 500 index’s history, funds that track it sure seem unlikely to perform well in the decade ahead.
The S&P 500 is near an all-time high, but some of its underappreciated components aren’t getting nearly as much attention as they deserve. Shares of Pfizer (NYSE: PFE) and AbbVie (NYSE: ABBV) offer dividend yields above 3% at recent prices and both appear likely to raise their payouts much further. Here’s why I expect both to outperform the benchmark in the decade ahead.
1. Pfizer
The first divided stock likely to outperform the S&P 500 index in the decade ahead is Pfizer. At recent prices, shares of the pharmaceutical giant offer a big 5.8% yield.
Last December, Pfizer raised its dividend payout for the 15th consecutive year. With such a high yield, Pfizer stock can deliver heaps of passive income to your brokerage account even if it doesn’t raise its payout further. With a slew of new patent-protected drugs to sell, Investors can reasonably expect their quarterly payments to rise steadily for at least another decade.
In 2023, Pfizer acquired Seagen, a company with four commercial-stage cancer therapies, for about $43 billion. Adcetris, Padcev, Tukysa, and Tivdak were generating an annualized $2.6 billion in combined sales when Pfizer took over. Under Pfizer’s wing, sales of the same four treatments have already soared to an annualized $3.3 billion, and they have much further to climb.
Management expects sales of the Seagen therapies it’s already marketing to pass $10 billion by 2030, and there are more growth drivers to push its big needle forward. The Food and Drug Administration (FDA) approved nine new medicines from Pfizer in 2023, and as of July 30, the company had 65 experimental medicines in clinical-stage testing.
Shares of Pfizer have been trading for the low multiple of just 11 times forward-looking earnings estimates. With an enormous development pipeline to offset sinking sales of aging blockbuster drugs, this stock is poised for a lot more growth than its valuation suggests.
2. AbbVie
AbbVie is another dividend-paying pharma giant that offers an above-average yield. At 3.2%, it’s not nearly as high as Pfizer’s yield, but investors who buy now could see their quarterly payments rocket higher in the coming decade.
On the surface, AbbVie seems like a stock to avoid, with second-quarter adjusted earnings that fell by 9% year over year. If you look a little closer, you’ll see that this company’s best days are still ahead of us.
AbbVie has been reporting an earnings decline because its former lead drug, Humira, lost patent-protected market exclusivity in the U.S. last year. Humira sales declined from $21.2 billion in 2022 to an annualized $11.3 billion during the second quarter.
Humira losses aren’t finished punching holes into AbbVie’s overall profit, but the worst losses are already over. The company wisely invested previous profits into the development of new products that pushed total second-quarter revenue 4.3% higher year over year.
AbbVie’s new lead drug, Skyrizi, can offset Humira losses on its own. The company launched the anti-inflammation injection for the treatment of psoriasis in 2019, and it’s already generating an annualized $10.9 billion in sales.
Also in 2019, AbbVie launched an arthritis drug called Rinvoq, and it’s nearly as successful as Skyrizi. Second-quarter Rinvoq sales rocketed 55% higher year over year to an annualized $5.7 billion.
AbbVie expects combined sales of Rinvoq and Skyrizi to grow past $27 billion in 2027. These aren’t its only growth drivers, either. This company also owns Botox, which is increasingly popular as both an aesthetic treatment to smooth out wrinkles and a prescribed therapeutic.
AbbVie shares have been trading at around 17.9 times forward-looking earnings expectations. That’s a fairly high multiple for most pharmaceutical companies, but they probably won’t grow as rapidly as this one. Adding some shares to a diverse portfolio now could greatly improve your chances of outperforming the S&P 500 index in the decade ahead.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie and Pfizer. The Motley Fool has a disclosure policy.
Prediction: These 2 High-Yield Dividend Stocks Will Outperform the S&P 500 Index in the Coming Decade was originally published by The Motley Fool
