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Not all high-yield dividend stocks are created equal. Some are genuine income compounders, while others are traps. And the current environment, with interest rates on the rise, makes it more difficult to differentiate the good from the bad.
AbbVie (NYSE: ABBV) is by no means a high-yield trap. This pharma stock is well-positioned to succeed in any rate cycle.
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What makes a stock a high-yield trap? Different investors can have different criteria, but there's one tell-tale sign. A stock with a high dividend yield but a payout ratio consistently above its free cash flow is almost always a trap. If a company doesn't generate sufficient free cash flow, it will be forced to cut its dividend sooner or later.
Rising interest rates make it especially difficult for companies with balance sheets loaded to the gills with floating-rate debt. They frequently must shift funds from the dividend program to cover their higher interest expenses.
Similarly, a company with a business model whose revenue is highly sensitive to consumer spending can experience problems when rates increase. When consumers have to spend more of their money on car and home loans and credit card debt, they have less money to buy these companies' products.
AbbVie doesn't have issues on any of these fronts. The drugmaker generates more than enough free cash flow to cover its quarterly dividend payment of $1.73 per share. While AbbVie's debt totals $70.8 billion, much of it is in fixed-rate senior notes that aren't sensitive to interest rate fluctuations. Patients don't quit taking AbbVie's medications because interest rates go up, either.
Importantly, AbbVie has increased its dividend for 54 consecutive years (including the period when it was part of Abbott Laboratories (NYSE: ABT)). This achievement qualifies the company to be part of the Dividend Kings, a group of stocks that have increased their dividends for at least 50 consecutive years.
As you might imagine, Dividend Kings are loath to break their dividend-hike streaks and lose their status in the elite group. Both Abbott and AbbVie have ensured their dividends keep flowing and growing regardless of what the Federal Reserve does with rates.
AbbVie shouldn't have much trouble holding onto its Dividend King membership for two key reasons: Skyrizi and Rinvoq. These two autoimmune disease drugs together raked in over $7.5 billion in the second quarter of 2026 alone. That's more than the $6.1 billion the company paid in dividends during the quarter.
Another important number to know is 90. That's roughly how many programs the company has in clinical development. Around 60 of them are in mid- or late-stage clinical studies. This robust pipeline should help ensure that AbbVie continues to generate plenty of revenue in the future to grow its dividend.
To be sure, AbbVie's dividend yield of 2.5% isn't nearly as high as it's been in the past. However, that isn't a poor reflection on the company's ability to pay dividends. Instead, it's a testament to how great AbbVie's stock has performed in recent years. Its share price has risen so much that the solid dividend growth hasn't kept pace, causing this yield to slide.
Like all biotech and pharmaceutical companies, AbbVie faces the risk of pipeline setbacks. The good news, though, is that the company has enough therapies in development to remain successful even if some don't fulfill their potential.
In a market where investors can easily get stuck with high-yield traps, AbbVie offers a solution. It's an ideal Dividend King to own for the long run.
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Keith Speights has positions in AbbVie. The Motley Fool has positions in and recommends AbbVie and Abbott Laboratories. The Motley Fool has a disclosure policy.
Forget High-Yield Traps: AbbVie Is the Dividend King to Buy and Hold Through Any Rate Cycle was originally published by The Motley Fool
