Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
Picking the best dividend stocks isn't just a matter of finding the highest-yielding picks. Top dividend stocks mix stable, profitable companies with dividends that will pay rewards for the long run. Two well-recognized diversified health care companies certainly meet the criteria for stability and profitability: Abbott Labs (NYSE: ABT ) and Johnson & Johnson (NYSE: JNJ ) . These are two of the biggest names in health care, and each sports a compelling reason for picking its dividend.
Just which one is the better pick for investors searching for the perfect dividend? Let's compare the two top-notch companies head to head to pick a long-term winner.
Dividend investors' delights
Both J&J and Abbott are dividend aristocrats -- members of the S&P 500 that have raised their dividends for at least 25 consecutive years. Abbott officially cut its dividend due to the spinoff of former pharmaceutical arm AbbVie (NYSE: ABBV ) early this year, but the S&P overlooked that -- and for investors, the company's post-pharmaceutical life is all that matters now. Considering that Abbott's business changed fundamentally with the spinoff, the dividend drop this year is something we can safely overlook.
Just looking at the company's yield, J&J offers a higher reward than Abbott, with a 2.9% yield to the latter's 1.6%. Neither company stretches their finances too thin to pay those dividends, either, with J&J sporting a 55% dividend payout ratio compared to Abbott's 52% ratio. Both payout ratios compare favorably to many big pharma leaders with top dividends, and they offer Abbott and J&J plenty of flexibility to continue raising their dividends in the future.
It's when we dig into the two companies' businesses that the real differences stand out. Abbott's spinoff of AbbVie lost the company star immunology drug Humira, a $9 billion sales king last year that fuels more than 50% of AbbVie's sales now. It changed one of big pharma's best into one focused on nutritional products, medical devices, and other areas. Abbott's not in danger because of the loss, but branded pharmaceuticals provide high profit margins for top big pharma firms -- something that Abbott will have to replace in the future.
Meanwhile, J&J's pharmaceutical business has emerged as the company's growth driver. Immunology star drug Remicade -- a top competitor of Humira that pulled down more than $6 billion last year -- anchors the company's division. Growing therapies like cancer drug Zytiga, which nearly hit blockbuster status last year with more than $960 million in sales, and recently approved diabetes medication Invokana -- which has compared favorably to Merck's (NYSE: MRK ) diabetes-fighting Januvia, a drug that made more than $5 billion for the firm last year -- should provide sales strength for Johnson & Johnson for years to come.
With Remicade's patent lasting for several more years and Zytiga and Invokana -- along with other recently approved drugs -- safely secure for years to come, it's safe to say that the company's pharmaceutical sales make a compelling case among big pharma's best even before including J&J's other businesses.
Downsides to both stocks
It's not as if Abbott doesn't have a growth driver of its own, however. The company's nutritionals segment has exploded in emerging markets. International nutritionals sales grew by 15% for pediatric products and 13% in adult products last year, and emerging market sales grew 13% in Abbott's second quarter this year -- powered by big boosts from Russia and China, among other leading developing economies. With baby formula demand climbing in growing economies like China and India, expect this division to remain a stable foundation of Abbott's future. It's already the company's largest division by sales in its post-pharmaceuticals life.
Both Abbott and J&J are heavily invested in medical devices as well, and while this industry provides plenty of stability going forward -- a key for dividend investors -- each company's segment faces challenges. Johnson & Johnson's medical device division has thrived on the back of its $21 billion acquisition of orthopedics powerhouse Synthes last year, but outside of the orthopedics realm, J&J's device segment has suffered through pricing pressures, tough competition, and a lackluster European market just like every other firm in the industry. However, the segment should be just fine in the long-term future due to obesity and aging trends in the orthopedics industry's favor -- and orthopedics make up the biggest portion of J&J's device division by sales.
Abbott's facing a different game in medical devices, as the company's Xience drug-eluting stent leads the market. However, Abbott's reliance on cardiovascular device sales puts the company squarely in the midst of a sector that's struggled mightily recently. As long as the Xience series continues to do well and Abbott's next-generation stent, the Absorb, can succeed in the U.S., this company's device sales should be fine in the long-term, even with the medical device sector's slump in recent quarters and Abbott's downbeat second quarter this year.
Even with the positives, both companies have drawbacks. Johnson & Johnson's consumer products division, which makes up more than a fifth of the company's total sales, has seen revenue slump both domestically and internationally, losing nearly 3% last year. Meanwhile, Abbott's generic drug division, its second-leading seller behind nutritionals, saw sales fall 4% last year, with its biggest revenue generator -- drug Clarithromycin -- lose 9%. If Abbott can't turn that number around, it'll need every dollar in sales growth from its nutritional department to stay on track.
Two can't-miss picks
In a battle between two top-notch diversified health care stocks, the truth is that both make extremely compelling cases to form a core part of any dividend investor's portfolio. Johnson & Johnson's higher yield and strong pharmaceuticals division will keep its stock surging for years to come, particularly as Remicade remains one of the industry's top-selling drugs and Invokana and Zytiga get their legs under them as nascent blockbusters. Meanwhile, Abbott's history of dividend increases and emerging markets power in its nutritionals segment bode well for this stock in the future.
I'll give Johnson & Johnson the nod by a hair because of this company's thriving success in pharmaceuticals and strong orthopedics device segment, along with its higher dividend yield. All in all, J&J and Abbott are two stocks that dividend investors can't go wrong in the long run by picking up.
Abbott and Johnson & Johnson are two of the most stable and attractive health care stocks for long-term success. However, smart investors know that, like Johnson & Johnson's business model, diversity is the key for profitability. If you're ready to look outside the health care sector for top-notch dividend stocks, the Motley Fool's special free report "Secure Your Future With 9 Rock-Solid Dividend Stocks" outlines the Fool's favorite dependable dividend-paying stocks across all sectors. Grab your free copy by clicking here.