Imagine earning $1,000 every year just from dividends. And over the years, that amount grows to $2,000 -- and maybe even higher. Best of all, because you've invested in a safe stock, you also won't have to worry about whether those payouts are going to continue, either. That makes for what I would call a great dividend stock.
This is the reality that all investors should aim for when selecting income investments to put into their portfolios. Today, we'll investigate whether Johnson & Johnson (JNJ -0.72%) stock belongs in that category.
Where the stock's yield is right now
Investors who own shares of Johnson & Johnson currently receive $1.01 every quarter per share, or $4.04 on an annual basis. With the stock trading at around $160, the dividend yield is just above 2.5%. It's a decent payout, and better than the 1.6% you would get with the average stock on the S&P 500. At Johnson & Johnson's current dividend rate, you would need to invest approximately $40,000 to expect to make $1,000 from the stock's quarterly distributions over the next 12 months.
This isn't the highest yield out there by any stretch. Even in the healthcare sector, drugmaker Merck pays a higher dividend yield at 3.4%. But the current payout is just one part of the equation, and it isn't enough to make a dividend stock great or not. It's also important to consider how much you might earn from the stock in the future.
Will the dividend increase?
It's always important to remind investors that dividends are at the company's discretion and are never a guarantee. But when talking about Johnson & Johnson, they're almost a sure thing. The company is a Dividend King, having increased its quarterly payouts for 58 years in a row. Its most recent hike came in April 2020, when Johnson & Johnson announced it was bumping up its payouts by 6.3%, from $0.95 to its current quarterly payment of $1.01.
In all likelihood, the company will raise its payouts again this April. Its payout ratio of 53% is manageable, and there looks to be room for Johnson & Johnson to hike its dividend a bit more. But to really be able to buy and forget about this stock, investors need to feel comfortable with the underlying business.
How is the business performing?
Johnson & Johnson released its year-end results for 2020 on Jan. 26, in which sales of $82.6 billion for the full year showed a slight 0.6% increase from the previous period. The company's broad mix of products enables the business to do well under a variety of different economic and market circumstances. Medical device revenue declined 11.6% during the year, which the company blamed on COVID-19 and deferred medical procedures. But that was offset by growth in other areas. Sales from its pharmaceutical segment were up 8%, and consumer health sales showed modest year-over-year growth of 1.1%.
The company's single-dose COVID-19 vaccine has the potential to make those numbers even stronger in the near future. Johnson & Johnson announced in January that its vaccine was up to 72% effective at preventing coronavirus infection in the U.S.-based trial and 66% overall. If it obtains Emergency Use Authorization (EUA) from the U.S. Food and Drug Administration (FDA), it could become a more attractive option than the two-dose vaccines from Moderna and Pfizer that are already available under EUAs. In October 2020, Johnson & Johnson also completed the acquisition of Momenta Pharmaceuticals, which will open up more opportunities in developing treatments for autoimmune diseases.
The business looks to be in good shape today, and down the road, things could be even better. That's great news for the dividend, as it makes it likely that Johnson & Johnson will continue paying and increasing its payouts for the foreseeable future.
Johnson & Johnson is a great dividend stock
The biggest knock on Johnson & Johnson's dividend is that the yield today isn't that great. However, over time, that can change if the company continues raising its payouts. If, for example, it were to increase its dividend payments every year by an average of 6%, they would double in 12 years.
And with many companies cutting or suspending their dividends amid the pandemic, a safe and stable payout from Johnson & Johnson stands out even more. The healthcare stock is one of the best income investments out there today, and it can serve as a pillar for your portfolio for years..