Prediction: These two high-yield dividend stocks will outperform the S&P 500 Index over the next decade

The major US stock market indices are officially in overheated territory thanks to the enthusiasm for artificial intelligence (AI). Since the end of 2022, the most popular benchmark has been the S&P 500 Index, is up about 51% to a high valuation that we haven’t seen since just before some major market crashes.

If we add up the last ten years of earnings, the average stock in the S&P 500 index trades at a cyclically adjusted price-to-earnings ratio (CAPE) of about 35.2, which is worryingly high.

S&P 500 Shiller CAPE Ratio data from YCharts

The S&P 500 CAPE ratio has only risen above 35 twice in the last 40 years: once during the Internet bubble of the late 1990s and again just before the market collapse in 2022.

An unusually high P/E ratio for benchmark market indices is no guarantee that a crash is imminent. Given the history of the S&P 500 index, it seems unlikely that funds that track it will perform well in the coming decade.

The S&P 500 is near an all-time high, but some of its underrated components aren’t getting nearly as much attention as they deserve. Shares of Pfizer (PFE -0.61%) And AbbVie (ABBV -0.08%) offer dividend yields of over 3% at current prices, and both are likely to increase their payouts significantly further. For this reason, I expect both to outperform the benchmark in the coming decade.

1. Pfizer

The first split stock likely to outperform the S&P 500 index in the coming decade is Pfizer. At current prices, the pharmaceutical giant’s shares offer a whopping return of 5.8%.

Last December, Pfizer increased its dividend payout for the 15th consecutive year. With such a high yield, Pfizer stock can provide a lot of passive income to your brokerage account, even if it doesn’t increase the payout any further. With a slew of new patent-protected drugs to sell, investors can 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 approximately $43 billion. Adcetris, Padcev, Tukysa and Tivdak had combined annual sales of $2.6 billion when acquired by Pfizer. Under Pfizer’s wing, sales of the same four treatments have already grown to $3.3 billion annually, and they have much more to grow.

Management expects sales of the Seagen therapies it already markets to exceed $10 billion by 2030, and there are other growth drivers that will advance the big goal. The Food and Drug Administration (FDA) has approved nine new drugs from Pfizer in 2023, and as of July 30, 65 of the company’s experimental drugs were in clinical trials.

Shares of Pfizer were trading at a low multiple of just 11 times forward-looking earnings estimates. With a massive development pipeline to offset declining sales of aging blockbuster drugs, this stock is poised for far greater growth than its valuation suggests.

2. FigVie

AbbVie is another pharmaceutical giant that pays a dividend and offers an above-average yield. At 3.2%, it’s not nearly as high as Pfizer’s yield, but investors who buy now could expect higher quarterly payments over the next decade.

On the surface, AbbVie appears to be a stock to avoid, as adjusted earnings fell 9% year-over-year in the second quarter. If you look a little closer, you’ll see that this company’s best days are still ahead of us.

AbbVie has reported a drop in profits as its former lead drug Humira lost patent-protected market exclusivity in the US last year. Humira sales fell from $21.2 billion in 2022 to $11.3 billion in the second quarter.

The Humira losses aren’t over yet, denting AbbVie’s overall profits, but the worst of the losses are already over. The company wisely reinvested previous profits into new product development, driving total second-quarter sales up 4.3% year-over-year.

AbbVie’s new lead drug, Skyrizi, can offset Humira’s losses on its own. The company launched the anti-inflammatory injection to treat psoriasis in 2019 and already generates annual sales of $10.9 billion.

Also in 2019, AbbVie launched an arthritis drug called Rinvoq, which is almost as successful as Skyrizi. Rinvoq sales rose 55% year-over-year to $5.7 billion annually in the second quarter.

AbbVie expects combined sales of Rinvoq and Skyrizi to exceed $27 billion in 2027. However, these are not the only growth drivers. This company also owns Botox, which is becoming increasingly popular both as an aesthetic treatment to smooth out wrinkles and as a prescribed therapeutic agent.

AbbVie shares trade at about 17.9 times forward earnings expectations. That’s a pretty high number for most pharmaceutical companies, but they probably won’t grow as fast as this one. Adding a few stocks to a diverse portfolio now could greatly improve your chances of outperforming the S&P 500 index in the coming decade.