Shares of medical products veteran Johnson & Johnson (NYSE:JNJ) come with a household name, decades of proven success, and a 2.4% dividend yield. The stock is popular among income investors, and for good reason. But there are many alternatives on the market with even richer yields and equally unassailable business models.
We asked a few of your fellow investors here at The Motley Fool to share dividend ideas that could offer better yields than Johnson & Johnson for the long haul. Read on to see why our panelists would prefer to put Archer Daniels Midland (NYSE:ADM), Procter & Gamble (NYSE:PG), or ExxonMobil (NYSE:XOM) in their dividend portfolios right now.
Earning its dividend aristocrat status in a volatile industry
Tyler Crowe (ExxonMobil): Finding a stock with a dividend yield greater than Johnson & Johnson's is actually a piece of cake. There are at least a thousand companies out there with a dividend yield higher than 2.36%. The greater challenge is finding a stock that has a higher yield and can provide the long-term dividend growth and stability that Johnson & Johnson's stock has provided investors. It may not have a 55-year history of dividend increases under its belt, but ExxonMobil's 35-year streak of dividend increases and a 3.7% yield is one worth considering.
One thing that adds to the impressiveness of ExxonMobil's dividend streak is that it has been able to achieve this in the highly cyclical business of oil and gas. Over those 35 years, we have experienced four epic oil price crashes (1980-1986, 1998, 2008-2009, 2014-2016). Thanks to ExxonMobil's vertically integrated business model and management's insistence on investing through the ups and downs of the commodity cycle, the company has been able to produce steady cash flows that fuel that growing dividend payment.
Even though oil prices are much lower than they were just a few years ago, management has responded by lowering the price at which it can break even. Today, management estimates that its current operations are free-cash-flow positive when oil prices are as low as $40 a barrel. With low-cost operations like that, it should be able to keep growing its dividend for some time with little fear for low oil prices.
A nice mix of growth and income
Demitri Kalogeropoulos (Procter & Gamble): Like Johnson & Johnson, Procter & Gamble is the dominant force in its industry. Through hit brands like Gillette, Tide, and Bounty, the consumer goods titan claims 65% of worldwide sales of razors and blades, 25% of the market for fabric care, and 40% of the U.S. paper towel niche.
To be sure, P&G's growth outlook isn't as strong as the healthcare giant's. Organic revenue is set to rise by just 2% this fiscal year, and that would count as a win in the sluggish consumer products industry. Johnson & Johnson, on the other hand, posted a double-digit sales gain in the most recent quarter thanks to a big assist from its pharmaceuticals business.
In exchange for that more modest growth profile, P&G shareholders get a meaty 3% dividend yield along with a decent chance at better returns ahead. After all, the company should improve on its expansion pace now that its portfolio is focused on just its strongest brands. Executives are still finding room to slash costs and increase efficiency, too, even after removing more than $10 billion of expenses over the past five years. Assuming P&G can end its stubborn two-year streak of market share losses, those savings promise to fund faster dividend growth for patient income investors.
Pumping corn products through a high-volume cash machine
Anders Bylund (Archer Daniels Midland): This maker of food ingredients, biofuels, and feedstock has mastered the fine art of thriving in a brutally competitive market of commodity products. That's no mean feat.
At 3.2%, Archer Daniels Midland's dividend yield easily tops Johnson & Johnson's 2.4%. The company is also a true-blue dividend aristocrat, having raised its payouts without interruption for the last 41 years. Moreover, only 52% of Archer Daniels Midland's free cash flows are being funneled into dividend checks these days, leaving plenty of room for further payout boosts.
That cash comes from a finely tuned cash machine, where operating margins in the low single digits tap into enormous sales volumes. Over the last four quarters, Archer Daniels Midland collected top-line revenues of $61.3 billion as a leading global provider of ingredients based on corn and oilseed grains.
It may not be an exciting business, but it's a tremendously secure one. Not even the droughts of 2012 managed to drive the company's profit margins below the break-even point. And the dividend increases just kept coming.
All things considered, Archer Daniels Midland's dividends are both generous and safe. Invest here if you want to sleep easy every night.
Anders Bylund has no position in any of the stocks mentioned. Demitrios Kalogeropoulos has no position in any of the stocks mentioned. Tyler Crowe owns shares of ExxonMobil. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.