Dividend stocks can be very valuable during tough times in the market, as their recurring payments can help offset losses and provide some positive returns for investors. The challenge, however, is picking a dividend stock that you can safely hold on to for years, even decades. For a dividend stock to truly be great, it needs to be consistent, paying a strong yield that's likely to grow over time. Let's take a look at whether Johnson & Johnson (NYSE:JNJ) ticks those boxes, and if it's a stock investors should consider for their portfolios today.
The company's been increasing its dividends for 57 years in a row
On April 25, 2019, Johnson & Johnson announced that it would be hiking its payouts by 5.6%, marking the 57th straight year of increases. That makes Johnson & Johnson not just a Dividend Aristocrat but a Dividend King. The company has increased its payouts even during recessions, and that's why the stock is still one of the safer bets out there even amid the coronavirus pandemic; it's likely to not only continue paying its dividend but increasing it as well.
Investors won't have to wait long to find out whether the streak will continue; the company typically announces the amount of any dividend increase by the end of April for the coming year.
The company's most recent increase was from $0.90 to $0.95. If we go back 10 years, Johnson & Johnson was paying investors $0.49 every quarter. That means the company's payouts have risen by 94% over the past decade, averaging a compounded annual growth rate of 6.8%. Given the current softness in the economy, it's likely that Johnson & Johnson will increase its payouts at a smaller rate this year. An increase of about 5.3% would be enough to push the dividend up to $1 per share. At that rate, shareholders would be earning an annual yield of approximately 2.8%, above the 2% dividend that investors can normally expect from the average S&P 500 stock.
Johnson & Johnson's faced challenges, but it's still a safe buy
In order for a dividend stock to be a solid long-term investment, it needs to be safe. Unfortunately, the past few years haven't been easy for Johnson & Johnson. It faces lawsuits regarding a faulty vaginal estrogen therapy, a link between its talc baby powder and ovarian cancer, its role in the opioid crisis, and unwanted side effects from its Risperdal drug. In February, the company was ordered to pay $750 million related to its baby powder products. Last year, a judge said the company needed to pay $465 million for its role in Oklahoma's opioid crisis. And there are still more lawsuits to come.
It's a risk for investors, but the good news is that the company is in strong shape to be able to handle all these legal challenges. In each of the past 10 years, Johnson & Johnson generated free cash flow of more than $10 billion. In 2019, it reached a 10-year high of $19.9 billion in free cash. Johnson & Johnson's operating margins have also consistently been above 23% during those years as well.
As concerning as it may be for investors to see these lawsuits, the company's financials show that Johnson & Johnson is still in solid shape, and that means its dividend is rock-solid and likely to continue rising for the foreseeable future.
This great dividend stock is one of the best out there
Johnson & Johnson's dividend is safe and likely to grow; that much is clear from its financial results. There are three segments of this healthcare company's business that make it a very diversified stock: pharmaceuticals, medical devices, and consumer products. They're all areas that are essential to patients and consumers, and that ensures that Johnson & Johnson's products are going to remain in demand, even during a pandemic.
While some dividend stocks may offer better yields, they're not nearly as safe as Johnson & Johnson's. That's why this dividend stock is great for investors, who can benefit from a growing payout and an above-average dividend yield without taking on significant risk. And investors can also benefit from the stock's growth. In five years, shares of Johnson & Johnson are up around 41%, well above the 31% returns that the S&P 500 has produced during that time.
For long-term investors, Johnson & Johnson is a great stock to put in your portfolio, and it can be an excellent pillar to build around.