Later this year, the Federal Reserve is projected to begin reducing interest rates. While the exact number of rate cuts is still uncertain, this regulatory action is expected to stimulate a surge in high-yield dividend stocks, primarily because fund managers tend to aggressively purchase high-yield dividend stocks in low-rate environments. That leads these stocks to typically outperform the major benchmark indices when interest rates start to decline.

Which high-yield dividend stocks are best positioned to capitalize on this historical trend? Telecom giant AT&T (NYSE: T) and drug manufacturer Pfizer (NYSE: PFE) appear to be deeply undervalued at their current levels. Furthermore, each stock offers a yield of over 6%, which should draw significant attention from fund managers once interest rates start to fall. Here’s a brief overview of the advantages and disadvantages associated with each stock.

AT&T: A sustainable 6.4% yield

AT&T, a prominent player in the U.S. telecom industry, is currently trading at a significant discount. The telecom industry’s average trailing price-to-earnings ratio is 11.7, while AT&T’s stock trades at a mere 8.84 trailing earnings.

This low valuation, coupled with AT&T’s impressive annualized yield of 6.4%, makes it a potentially attractive pick for value and income investors alike. After all, AT&T’s yield significantly exceeds the 4% average among global telecom companies and the 1.47% average yield among S&P 500 listed stocks.

Best of all, AT&T’s substantial yield appears sustainable, thanks to the company’s ambitious cost-savings plan. Initiated in 2020, this plan aimed to achieve $6 billion in savings. Having already met this goal, the company is now working toward reducing costs by another $2 billion-plus by mid-2026.

This significant expense reduction is expected to support AT&T’s top-tier dividend program and assist in debt repayment. This is particularly important, as AT&T’s last reported debt-to-equity ratio was 135, indicating a heavily debt-laden balance sheet.

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However, AT&T isn’t expected to post substantial top-line growth this decade, because of intense competition. Wall Street anticipates the company’s revenue to grow by a modest 0.8% in 2025, and most analysts expect this low single-digit growth trend to persist for the remainder of the 2020s.

In all, AT&T stock screens as a top buy for its hefty dividend yield, extremely attractive valuation, and improving fundamentals.

Pfizer: A 6.2% yield at a bargain basement valuation

Pfizer, a leading pharmaceutical company globally, has experienced a significant drop in its share price over the past two years. This decline is primarily due to a marked decrease in the sales of its COVID-19 products and the impending expiration of several major patents.

Despite these challenges, Pfizer’s stock could be an outstanding bargain for long-term investors. The company’s shares are currently trading at about 12 times forward earnings, significantly lower than the industry average of 17.

Moreover, Pfizer offers the highest yield among big pharma stocks, with a noteworthy 6.2% yield at current levels. By contrast, the average yield among this group presently stands at a far less impressive 3.6%.

Why is Pfizer stock trading at a potential discount? The market appears skeptical about Pfizer’s clinical pipeline, even after the company’s string of multibillion-dollar buyouts.

However, Pfizer’s robust oncology pipeline holds the potential to produce several new blockbuster drugs by the decade’s end. If that happens, the drugmaker’s shares should deliver stellar returns for shareholders over the next five to 10 years.

This big pharma stock comes across as a top buy because of its potentially undervalued pipeline, especially in oncology, and also because of its ultra-high yield and attractive valuation.

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George Budwell has positions in AT&T and Pfizer. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.

2 Ultra-High-Yield Dividend Stocks to Buy and Hold Forever was originally published by The Motley Fool