Actively managing a portfolio of stocks can be tiring, especially if you own too many volatile ones that need constant attention. But owning a low-cost index fund can be dull, the dividend yields can be unimpressive, and you never know exactly what you own.
Johnson & Johnson
Johnson & Johnson is ideal for conservative investors because it's so diversified among its three core pillars -- pharmaceutical products, consumer healthcare, and medical devices -- that it's hard for any single headwind to blow the entire company off course. This means that investors shouldn't fret over near-term threats like generic competition for its blockbuster drug Remicade, or the recalls and lawsuits targeting some of its products.
On a quarterly basis, J&J's growth looks glacial. Total revenues rose just 1.7% annually last quarter, with pharmaceutical revenues rising 2.1%, consumer revenues rising 3.4%, and medical devices revenue inching up 0.2%. But over the long term, J&J's slow and steady growth is much easier to see -- its annual revenue rose 35% between 2006 and 2016, its adjusted EPS rose 80%, and its stock rose nearly 90%.
Those rock-solid returns have given J&J plenty of cash to spend on dividends, which it has hiked annually for over five decades. J&J currently pays a forward yield of 2.8%, which is higher than the S&P 500's 2% yield and comfortably supported by its payout ratio of 54%. All these factors make J&J a great "buy and forget" stock for most long-term portfolios.
PepsiCo might seem like a risky long-term play, since soda consumption in the U.S. has fallen to its lowest point in over three decades. However, PepsiCo also sells a wide variety of other products -- like juices, teas, sports drinks, bottled water, Quaker packaged foods, and Frito-Lay snacks -- that include 22 billion-dollar brands. That makes it a much better diversified company than its primary rival, Coca-Cola, which doesn't sell packaged foods.
Like J&J, PepsiCo's growth doesn't seem impressive on a quarterly basis -- its revenue fell 2% annually last quarter, mainly due to currency headwinds gobbling up its overseas gains. But since currencies fluctuate over the years, investors should focus on PepsiCo's organic growth, which excludes currency impacts and divestments. On that basis, PepsiCo's revenue rose 4% annually last quarter, and is expected to rise 4% for the full year.
Over the long term, currency headwinds even out -- that's why PepsiCo's reported annual revenue (including currency impacts) rose a whopping 94% between fiscal 2005 and 2015 as its EPS rose 54%. That growth boosted PepsiCo's stock price by nearly 80% over the past decade. It also provided it with enough cash to raise its dividend annually for over four decades. PepsiCo currently pays a forward yield of 2.9%, which is supported by a sustainable payout ratio of 64%.
AT&T is another great core holding for conservative income investors. The telecom giant's moats in wireless services, internet, and pay TV services are so wide that you can count its remaining competitors on one hand. AT&T's growth initially looks tepid, due to its size, sluggish growth in wireless subscribers, and ongoing divestments of its wireline businesses.
However, AT&T entered a new era of growth with its acquisition of DirecTV in 2015. That purchase enabled it to bundle its wireless and pay TV offerings together in a streaming video package that doesn't count toward users' data caps. Its proposed acquisition of Time Warner, which still has to clear regulatory approval, will further expand that ecosystem and make Ma Bell a media powerhouse that controls both the pipes and the content.
That's why AT&T defied its reputation as a stagnant income play and rallied about 20% over the past two years. While there are still plenty of challenges ahead for AT&T, it will likely remain the nation's top pay TV provider, top fixed telephone line provider, and second largest wireless carrier for the foreseeable future. This means that it will likely keep raising its dividend -- as it has done every year for over three decades. AT&T currently pays a forward yield of 4.8%, which is supported by a payout ratio of 81%.
The key takeaway
There's no such thing as a perfect "buy and forget" stock, but Johnson & Johnson, PepsiCo, and AT&T come close. All three companies have wide competitive moats, have proved resilient during market downturns, and are Dividend Aristocrats that have hiked their dividends every year for at least 25 straight years -- so you don't need to check up on them every quarter.