Bargain hunting for inexpensive dividend stocks is a good habit if you're trying to build a passive income stream from your investments. If you have the wherewithal to buy shares of companies that have taken a beating during the latest bear market, procuring stocks while their prices are lower than warranted means locking in higher dividend yields for years to come.
That's easier said than done, though. There's not much point to investing in a stock for its passive income potential if management is just going to cut the dividend before you can reap the rewards. With that in mind, here are two passive income candidates -- but only one of them is worth your money at the moment.
1. Viatris
Viatris (NASDAQ: VTRS) is a relative newcomer to the passive income stock scene, having spun off from Pfizer in late 2020. Its line of business is predominantly manufacturing high-demand generic medications like Lipitor and Zoloft. Investors who buy the stock today are banking on its becoming an efficient and low-cost producer of medicines in the medium term, large-scale sales of which will generate returns for its shareholders. And with more than $17.8 billion in revenue for 2021, it's already well on its way.
Next year, it'll use the cash it got from recently divesting some of its underperforming business units, like its biosimilars segment, to reduce its debt load of near $20.2 billion while also buying back its shares and hiking its dividend. Top-line growth won't be an immediate focus. For the four years after 2023 and perhaps beyond, the company aims to use half of its free cash flow (FCF) on dividends and share repurchases.
The company also looks to grow its adjusted earnings per share (EPS) at about a 15% annual rate. To do that, it'll need to succeed with commercializing a handful of its medicines in the pipeline, especially in its new ophthalmology segment, which currently has five programs in the mid to late stages of clinical trials. But commercializing programs in its complex injectable drugs segment could carry the day too.
In terms of its payout, Viatris' forward dividend yield is nearly 4.5%, so if you invest about $5,000, you'll get roughly $223 in annual income in the first year. What's more, you'll get that yearly dose quite cheaply. At the moment, Viatris' price-to-book (P/B) ratio is a mere 0.7, dramatically lower than the pharmaceutical preparation industry's average P/B of 9.2. That means if the business goes bankrupt, its assets will likely be sufficient to pay off shareholders, which somewhat lowers the risk of owning the stock.
2. PetMed Express
PetMed Express (NASDAQ: PETS) ships medicines for Fido to your doorstep, which is really useful for those of us who love healthy pets. But it takes more than that to make a good dividend stock. The company's forward annual dividend yield of around 6.6% is a tempting trap, and here's why.
Thanks to sales from customers enrolled in its automatic prescription refill program, PetMed's base of recurring revenue totaled $250 million in 2022. But that's up a mere $2 million from 2020. Flat revenue growth is only a part of a broader pattern of challenges for this business. Quarterly net income declined 71.5% over the past five years.
Meanwhile, PetMed's payout ratio is a frighteningly unsustainable 156% of its earnings, so its dividend is likely to be on the chopping block within the next few years if its situation doesn't improve.
What's more, the company's plan is to diversify into offering telemedicine for pets. It bears mentioning that major telemedicine businesses like Teladoc Health have yet to crack the code for profitably providing telemedicine for humans -- a far larger market. Furthermore, it'll take some spending and several years of ramp-up before PetMed's telemedicine offerings have any chance of being profitable, if they ever are.
With such challenges ahead for PetMed, it's best to invest in a dividend stock that carries a bit lower risk.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer and Teladoc Health. The Motley Fool recommends Viatris. The Motley Fool has a disclosure policy.
