Do you consider the health care sector an essential ingredient in your retirement portfolio? If you answered “yes,” Pfizer (NYSE:PFE) likely is at the top of your list of stocks. With a dividend yield currently above 4% — thanks to a 10% increase of its quarterly payment — income investors are surely happy. In addition, management has set aside an additional $10 billion for share repurchases, further enhancing shareholder value.
But before you pull the trigger on the world’s largest pharmaceutical company, you might want to consider some ETF alternatives, given Pfizer’s pressing need to replace Lipitor. A little diversification goes a long way.
According to my estimation, there are 61 exchange-traded funds with Pfizer as a top-10 holding. We’ll only look at those funds where Pfizer is at least a 5% weighting or higher. This narrows the search to 12 ETFs, a far more manageable number.
In deference to diversification, you’ll be wise to consider those funds whose scope is wider than just pharmaceutical companies, but also covers biotechnology, health care plans, medical equipment, medical labs, research and other related industries. The fund that does the best job covering the bases in the fewest number of stocks will be the preferred candidate.
In terms of assets under management, the Select Sector Health Care SPDR (NYSE:XLV) is the biggest fund with $4.1 billion spread among 52 holdings, including Pfizer, which represents 12.35% of the portfolio. Included in the top 10 holdings are a biotechnology company in Amgen (NASDAQ:AMGN), a health care plan provider in UnitedHealth Group (NYSE:UNH), and a medical device company in Medtronic (NYSE:MDT). Pharmaceuticals comprise 50.4% of the portfolio, with five additional industries accounting for the rest.
In the long term — whether we’re talking three years, five or 10 — XLV has easily outperformed Pfizer. Only in the past year has Pfizer been able to make up any ground. Where the fund seems to shine is on the downside. In the past 20 quarters, Pfizer has had 10 winners and 10 losers; in eight of the 10 quarters with negative performance, XLV handily beat Pfizer. While XLV might deliver a dividend yield of only 1.9%, it more than makes up for the shortfall with capital appreciation.
If you simply must have a higher yield, iShares could do the trick. The High Dividend Equity Fund (NYSE:HDV) is less than a year old (March 29, 2011, inception date) and already has more than $1 billion in total net assets. That’s a huge amount in just 10 months. It’s easy to see that investors are interested in dividends. HDV has a total of 76 holdings, with Pfizer as the second-largest position at 7.4%. Health care is the largest sector represented at 28.41% of its overall holdings, and consumer goods is the second-largest sector with 24.15%. Together, they represent more than 50% of the portfolio. HDV’s 30-day SEC yield is 3.61%, which isn’t quite up to speed with Pfizer’s yield, but it’s close enough. If you don’t need micro-cap or small-cap representation in your portfolio, this single ETF could easily cover off your domestic equity needs.
Finally, for those interested in owning Pfizer while also creating a completely passive portfolio, iShares offers the S&P Growth Allocation Fund (NYSE:AOR), which seeks investment results similar to the S&P Target Risk Growth Index. A total of nine ETFs are part of the allocation, with the iShares S&P 500 Index Fund (NYSE:IVV) the largest component at 29.34% of the overall portfolio. Pfizer itself represents 1.44% of the S&P 500 Index Fund, and while it’s not a huge position, it does give you a fully diversified investment portfolio with a dividend yield around 2.4%.
Investing in individual companies like Pfizer — and PFE stock itself — isn’t a bad idea. A few good bets held indefinitely can go a long way to achieving your retirement goals. However, for those who want to hedge their bets, the ETFs described above can help you achieve a greater sense of balance and safety — and in cases like the XLV, better performance.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.