1 Dividend Stock to Buy Hand Over Fist in May and 1 to Avoid

Some dividend stocks will pay a tidy and ever-increasing sum into your account for years. Others will run out of steam and slash your quarterly paycheck. Ideally, you'd buy shares of the first kind and avoid the second kind. So here's one example of each.

Investor holds a paper while presenting an idea to another investor in a conference room.

Image source: Getty Images.

1. AbbVie

AbbVie (NYSE: ABBV) is a major pharmaceutical company that's also a majorly appealing dividend stock. Thanks to its colossal drug development pipeline with more than 240 different ongoing clinical trials, and a portfolio of marketed medicines borne from 25 major regulatory approvals since its inception in 2013, AbbVie has both a track record of success and a long future of likely growth ahead.

In 2024 alone, AbbVie plans to send six more programs to regulators for their review, and it could commercialize seven others too. That's a huge amount of activity, even by the standards of big pharma.

To sweeten the pot even further for shareholders, its forward dividend yield is 3.7%, which is much higher than the market's average forward yield near 1.6%. That means you'll be getting more dividend income per share with an investment in AbbVie than you would with an index fund.

More importantly for long-term investors, over the last five years, its dividend per share grew at an average annual rate of 17.6%, rising by a total of 54.1%, though that pace has slowed considerably, and it only hiked the dividend by 8.4% for 2023.

Management is signaling that increasing the payout even further is a priority. There's reason to believe they'll be able to do so. As AbbVie's payout ratio is near 85% of its 2022 annual earnings of $11.8 billion, there's still some room for the dividend to grow in the absence of earnings growth.

That's key, since the company is entering a transitional period with its revenue mix for the next two years as its top-earning medicine, Humira, gets its market share eaten by new generic copies. After that, management expects a return to annual earnings growth in the ballpark of 8% through the end of the decade, which isn't half bad.

As the transitional period (hopefully) proceeds without incident, its share price is likely to rise, which will lower the dividend yield. So investors might want to consider a purchase within the year for an optimal passive income impact. It reports Q1 earnings on April 27, so buying after that could be a smart move.

2. Walgreens

Walgreens Boots Alliance (NASDAQ: WBA) is, unfortunately, very much the opposite story of AbbVie's.

The last five years saw the pharmacy chain's quarterly revenue remain almost flat and its quarterly earnings decline by 47.6% to reach $703 million in Q2 of 2023. In the same period, its quarterly free cash flow (FCF) dwindled by 87% to reach $248 million. Those stats aren't the marks of a healthy company, to say the least. It also sold off investments in a trio of other healthcare businesses from November 2022 through March 2023, generating more than $3.6 billion in cash in the process.

There are a few problems at play for Walgreens, none of which can be easily fixed. To gin up some growth, it's trying to enter the primary care market by providing additional services at its pharmacies, and it's also trying to enter the specialty care and post-acute care markets.

At the same time, its core segment, U.S. retail pharmacies, is failing to post year-over-year growth, and it's rapidly becoming less profitable as demand for services like coronavirus vaccination plummet. Put differently, it needs to be making big capital outlays and running losses for the next few years while it spins up new expansion initiatives, right when its formerly reliable source of income is starting to run dry.

The dividend is one place where management is trying to conserve capital; since 2018, its payout only grew by 20%, though its forward yield of 5.3% is presently on the higher side. A lack of further hikes or perhaps even a cut to the dividend is entirely on the table.

In Q2, its FCF was smaller than the $414 million outflow of paying its dividend. It still has upwards of $1.8 billion in cash and equivalents, but that might not last very long, considering that it burned more than $2.3 billion in the second quarter alone.

So it probably makes sense to avoid buying Walgreens stock for now. While there might be a few positive signs when it reports earnings in late June, don't hold your breath.

10 stocks we like better than AbbVie
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and AbbVie wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of April 10, 2023

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.