A Dividend Stock Worth Owning Forever?
One of the main reasons I like blue-chip dividend stocks is that they’re great for retirement investors. In an era when savings accounts pay next to nothing, a reliable stream of dividends can go a long way toward helping folks enjoy their golden years.
One company that has done a fantastic job on the dividend front is Johnson & Johnson (NYSE:JNJ). In fact, because of JNJ stock’s strong share-price performance, not only has it provided reliable passive income, but it has also allowed some investors to retire early. Over the past 20 years, the total return from Johnson & Johnson stock is over 450%.
Obviously, that massive return also means JNJ stock is more expensive than before. Indeed, from a valuation perspective, Johnson & Johnson stock isn’t cheap compared to its past or its peers.
But there are still very good reasons to consider JNJ stock for a retirement portfolio.
Johnson & Johnson (NYSE:JNJ) Stock Chart
Chart courtesy of StockCharts.com
First, Johnson & Johnson stock yields 2.4%. That’s not only better than what you get from any savings account these days, but also higher than the average dividend yield of all S&P 500 companies, which is 1.3% at the moment. (Source: “S&P 500 Dividend Yield,” multpl.com, last accessed August 27, 2021.)
Second, JNJ stock pays increasing dividends, so investors who buy shares today can look forward to earning higher yield on cost in the years ahead.
In fact, Johnson & Johnson stock has one of the longest track records of payout increases in the entire stock market. The company was raising its dividends when the dotcom bubble burst, when the economy was struggling in the Great Recession, and when we were in lockdowns at the onset of the COVID-19 pandemic.
The latest dividend hike arrived this April, when the board of directors of Johnson & Johnson declared a five-percent increase in the quarterly dividend from $1.01 to $1.06 per share. (Source: “Johnson & Johnson Announces Dividend Increase of 5.0%,” Johnson & Johnson, April 20, 2021.)
With that announcement, the company has increased its dividend for the 59th consecutive year.
Those dividend hikes were backed by a growing business. Although Johnson & Johnson is a century-old company, its operational sales increased at an average annual rate of six percent over the last 20 years. Better yet, its adjusted earnings per share (EPS) grew at an even faster annual clip of eight percent during the same period. (Source: “2020 Investor Fact Sheet,” Johnson & Johnson, last accessed August 27, 2021.)
The best part is, after nearly six decades of nonstop dividend hikes, Johnson & Johnson still maintains a rather conservative payout ratio. In 2020, the company generated adjusted earnings of $8.03 per share while paying four quarterly dividends totaling $3.98 per share. (Source: “Johnson & Johnson Reports 2020 Fourth-Quarter and Full Year Results,” Johnson & Johnson, January 26, 2021.)
In other words, the company was paying less than half of its adjusted profits last year. And last year was a very challenging period for numerous businesses around the globe due to the COVID-19 pandemic.
Looking at Johnson & Johnson’s latest earnings report, we see that the company’s business continues to grow and its dividends remain well covered.
In the second quarter of 2021, Johnson & Johnson generated $23.3 billion in sales, representing a 27.1% increase year-over-year. Notably, all three main segments of the company—Consumer Health, Pharmaceutical, and Medical Devices—delivered strong operational sales growth during the quarter. (Source: “Johnson & Johnson Reports Q2 2021 Results,” Johnson & Johnson, July 21, 2021.)
At the bottom line, the company’s adjusted earnings came in at $2.48 per share for the quarter, up by 48.5% from the $1.67 per share in the year-ago period. The amount easily covered Johnson & Johnson stock’s quarterly dividend payment of $1.06 per share.
Why Johnson & Johnson Stock Deserves to Be in an Income Portfolio
The most important reason to consider JNJ stock doesn’t lie in the numbers mentioned above; it’s the nature of the company’s business.
Johnson & Johnson has a strong global position in the consumer health, pharmaceutical, and medical devices markets. It has a huge pipeline with industry-leading research-and-development investment. The company generates about 70% of its sales from products with either the No. 1 or No. 2 market-share position.
Simply put, it’s the entrenched position that the company has in the global health-care industry that has allowed it to pay steadily increasing dividends. Due to the growth in its business and the recession-proof nature of the health-care industry, Johnson & Johnson should have no problem continuing that track record for years and decades to come.