My 2 Favorite Dividend Stocks to Buy in August

When a raging bull market eventually loses momentum, investors generally rotate into stable, income-generating stocks. When most stocks look expensive, dividend stocks can be reliable income payors that send you checks regularly.

However, investing in broad index funds isn't the solution either, with the S&P 500 Index's average dividend yield near an all-time low of 1.05%. If you're looking to generate real income, you have to hunt for individual standouts.

There are still a few quality dividend stocks investors can buy today, even in this age of low yields. Here's why Pfizer (NYSE: PFE) and Nintendo (OTC: NTDOY) are two forgotten dividend stocks investors can lap up for their portfolios today.

Pfizer's high dividend payment

Pfizer is a pharmaceutical giant whose stock has been stuck in the mud. In fact, over the last five years, the stock's shares have fallen 38% while the broad indexes have soared.

The problem is threefold. Pfizer was a major beneficiary of the COVID-19 pandemic by selling vaccines and treatments for the infection, including the treatment Paxlovid. Now, COVID-19 revenue has completely collapsed. Second, Pfizer is facing a patent cliff with certain drugs such as Eliquis for blood thinning and Ibrance for breast cancer. Third, the company took on significant debt to acquire companies such as Seagen and Matsera, with total net debt exceeding $53 billion.

However, the world is not ending for Pfizer. The pharma giant has a highly diversified revenue base and generated nearly $11 billion in free cash flow over the last twelve months. Its Seagen acquisition delivered 21% revenue growth for its cancer drugs, while Metsera is exploring products in the weight-loss drug category.

Right now, Pfizer's stock is being heavily discounted, with a dividend yield at 6%. If you believe the company can slowly pay down its debt and grow through its new acquisitions and internal research pipeline, this dividend should provide reliable income that can grow over the coming years.

Nintendo's growing earnings power

One of the most underrated dividend stocks out there is the video game giant Nintendo. It has durable entertainment franchises along with a vertically integrated gaming hardware model that keeps players coming back for its products time and time again. With its profits, it has a stated dividend policy of paying out dividends twice a year, with the total payout ratio being the greater of 40% of consolidated operating earnings or 60% of its consolidated net profit after taxes.

This means, if Nintendo's earnings rise, so will its dividend payouts. Last year, Nintendo launched the Nintendo Switch 2, which has already sold close to 24 million units globally in the last twelve months. With gaming devices in customers' hands, customers will begin buying highly profitable first-party gaming titles.

We can see this in net income growth, which has already surpassed $3 billion over the last twelve months. Once more people buy Nintendo Switch 2's over the next five years and beyond, it will be able to sell more software to them, and grow profits, which will lead to higher dividend payments. Right now, Nintendo has a dividend that yields 2.45%, but I believe its future dividend payouts will be much higher, making it a fantastic dividend stock to buy now.

PFE Free Cash Flow data by YCharts.

Why these are great dividend stocks

Pfizer and Nintendo make great dividend stocks for different reasons. Pfizer starts at a high dividend yield, and has a diversified business and sufficient free cash flow to cover dividend payments and service its debt.

Nintendo is at a profit inflection and has a mandated payout ratio that should lead to solid dividend payments in the years ahead. Combined, they will make great dividend stocks to add to your portfolio over the next few years.

Brett Schafer has positions in Nintendo. The Motley Fool has positions in and recommends Nintendo and Pfizer. The Motley Fool has a disclosure policy.