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11 Incredible Dividend Stocks: Johnson & Johnson

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This article is part of our weeklong series on 11 incredible dividend stocks. You can get the lowdown on this series by clicking here.

Dividends rock. They force management teams to stay disciplined, line your pockets with cash, and pay you to wait while a value-centric investing thesis plays out. Even better, studies have shown time and time again that dividend-paying stocks outperform.

Dividend stocks really do allow investors to have their cake (score high returns) and eat it, too (with low-risk stocks). That's why our recommendations list is chock-full of them at Inside Value, and why I'm firing a new one your way today: health-care kingpin Johnson & Johnson  (NYSE: JNJ  ) .

I know, I know, you've heard this one before. You might have even owned J&J over the past few years, as the business has muddled along through a recession, a retooling of the U.S. health-care industry, and a smattering of product recalls that have dragged J&J's name through the mud.

But while the recalls are unfortunate, negative headlines are a contrarian's best friend. The concerns over product recalls and how government's involvement will affect health-care profits are overblown. Like the dramatic Tylenol recalls of the 1980s, this, too, shall pass, making now the time to get on board and invest in uber-blue chip Johnson & Johnson.

The business
Johnson & Johnson is a household name on Wall Street and Main Street, operating in 60 countries. Founded in 1886, J&J is the world's largest medical-device and diagnostics company, the sixth-largest consumer company, and the eighth-largest pharmaceuticals company.

Odds are you've been up close and very personal with a smattering of Johnson & Johnson's consumer health and personal products. Brands including Band-Aid, Tylenol, Listerine, Visine, Neutrogena, Johnson's baby care products, and a host of others fill medicine cabinets the world over.

The consumer business has great staying power, but its 24% of companywide sales makes it the smallest of the J&J's three units. The medical devices and diagnostics unit is J&J's alpha dog, accounting for 40% of sales, while pharmaceuticals round out the other 36%. The medical-device business makes products that allay more ailments than you can shake a ceramic hip at. Through brands such as DePuy, Cordis, and Animas, the company has its hands in everything from orthopedics to implants to insulin.

Company Johnson & Johnson
Dividend Yield 3.5%
5-Year Avg. Dividend Growth Rate 10.4%
Payout Ratio 48.3%
Years of Dividend Increases 49

Why it's incredible
Why is J&J amazing? What, you mean besides…

  • Boasting 49 straight years of dividend increases?
  • Being one of only four companies with a AAA credit rating?
  • Returning $49 billion to shareholders via buybacks and dividends from 2006-2010?

Underlying those numbers are a great, diverse portfolio of brands, an R&D engine powered by $7 billion annually, and a long, trusted history with doctors and patients. Little wonder that J&J ranks No. 1 or No. 2 in 17 of its 20 largest platforms.

Dividend strength
J&J's net margin hovers near 20% — impressive for most any business, but applause-worthy when you're talking about $62 billion in annual sales. Meanwhile, its balance sheet is a fortress, with a net cash position of $9 billion. The proof of the profit pudding is the cash flow statement, though. J&J turns about 20% of its sales into free cash flow.

Another plus is the diversity of J&J's revenue streams. Its largest product, Remicade, accounts for only 7% of sales. That slice should rise -- in a good way -- thanks to a deal that J&J recently struck with its partner on the drug, Merck (NYSE: MRK  ) , which will give J&J a bigger portion of the drug's total sales. All in all, J&J's 3.5% payout is rock solid.

Headline risk is no joke with J&J, given the product recall issue, but J&J has a diversified revenue base that keeps any single brand's wreckage from bringing down the house. Plus, this isn't the company's first public-relations rodeo.

Naturally, J&J isn't immune to the run-of-the-mill risks health-care companies face, including heavy-handed regulators, lawsuits, headline risk, generic competition, and patent expirations. Investors have been particularly concerned about how increased government regulation will affect health-care companies' profits -- particularly in the U.S. But if you're worried about Obamacare hurting the bottom line, keep perspective: 52% of the company's sales come from outside the U.S.

In sum…
Diverse operations, consistent cash flow, and a Gibraltar-like balance sheet make J&J a low-risk investment. And thanks to its out-of-favor status and a bulletproof 3.5% yield, the stock has fries (upside) to go with that shake (low risk). Great businesses don't trade on the cheap for long, so hop on this while the headlines are still negative -- and wrong. 

Joe Magyer owns shares of Johnson & Johnson, as does The Motley Fool. You can follow Joe's musings on Twitter via @TMFInsideValue. The Motley Fool's disclosure policy doesn't bleed. Hence, it has no use for Band-Aids.

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