How Dividends Change the Game for Johnson & Johnson Stock

The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Today, we'll dive deeper into health care and consumer products giant Johnson & Johnson (NYSE: JNJ  ) . Owning Johnson & Johnson stock as a dividend play makes all kinds of sense, because the company scores better than the Dow Jones Industrial Average (DJINDICES: ^DJI  ) in nearly every income-production category.

J&J has increased its payout by an annual compound average of 11.5% over the last decade. That's the 12th-most generous policy increase among the Dow's 30 members. Its 3% yield ties for 10th place alongside fellow household name Procter & Gamble (NYSE: PG  ) , but consumer goods specialist P&G can't quite match Johnson's dividend increases. Moreover, P&G shares have gained 29% over the last year in dividend-adjusted terms -- respectable, but not even close to Johnson's 44% jump. That 3% dividend yield looks all the more respectable against that rapid rise, which serves as a headwind for rich yields.

Now, a large chunk of J&J's outperformance happened in the last year. The company seems poised to make a mint on Obamacare. CEO William Weldon even voiced public support for the controversial policy in 2011. P&G investors, on the other hand, can't hang their hat on that catalyst. So in some ways, it's not a fair fight.

Then again, Obamacare is coming, and J&J can sit back to reap the rewards. There's nothing wrong with cashing in on a policy change, even if it's a controversial one. So this one-time catalyst is set to play itself out over the next few years, giving Johnson & Johnson's shares even more fuel for higher share prices and more generous dividends.

And when you get right down to brass tacks, J&J's dividends help a fairly mediocre long-term performer beat its Dow peers by a significant margin. Rock-steady dividend increases play a large role in this story, and long-term shareholders collect all the benefits.

JNJ Chart

JNJ data by YCharts.

Is bigger really better?
Involved in everything from baby powder to biotech, Johnson & Johnson is criticized by some as being spread way too thin. If you want to know whether J&J is just a bloated corporate whale or a well-diversified giant that's perfect for your portfolio, check out the Fool's new premium report outlining the Johnson & Johnson story in terms that any investor can understand. Claim your copy by clicking here now.


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