If you only look at a stock's current dividend yield, you could get an incomplete picture as to how much recurring revenue it can actually generate for you. Dividend growth is an important consideration because if a company increases its payouts, your recurring income will grow over time. And if a company's dividend remains unchanged, then that means inflation will cut into your earnings over time. 

One company that falls into the former category is Johnson & Johnson (NYSE:JNJ). A Dividend King, the company has raised its dividend payments for more than 50 years in a row. It is one of the best dividend growth stocks you will find on the markets. And below, I will look at how much recurring income you could earn from the stock in the next five years.

Young person uses a tablet to investigate a bar graph with a trend line, sitting on a ladder beside a cup of coffee.

Image source: Getty Images

Where the dividend is today

On April 20, Johnson & Johnson announced that it would be raising its dividend for the 59th year in a row. Its quarterly dividend payments are now at $1.06 per share, 5% higher than the $1.01 the healthcare company was previously paying. With a share price at around $170, the stock is yielding about 2.5% -- well above the S&P 500 average of just 1.4%. On a $25,000 investment, you would be able to buy roughly 147 shares of the company. And that would translate into $623 in annual dividend income (or about $156 each quarter) if the company were to keep its current dividend payments intact. 

The dividend looks good today but if Johnson & Johnson continues to increase its payouts, it will be even better in future years.

How high could the dividend go in 5 years?

To estimate how the dividend might look in the years ahead, let's use the past. Below are the company's June dividend payments in each of the past five years. I'm using June since that is when Johnson & Johnson's annual rate hikes go into effect.

  Dividend Payment Percent Change From Previous Year
2021 $1.06 5%
2020 $1.01 6.3%
2019 $0.95 5.6%
2018 $0.90 7.1%
2017 $0.84 5%

Source: Company filings

The company has raised its dividend payments by at least 5% in each of the past five years. And with its COVID-19 vaccine potentially giving it a boost in the next year or two, it is possible that Johnson & Johnson may give investors bigger-than-normal increases in the years ahead. Its 70% payout ratio isn't terribly high and suggests that there could be more room for more rate hikes in the future. But for the sake of being conservative, let's assume that the company will increase its dividends by no more than 5% each year. If that's the case, then after another five years of increases, the dividend would increase by 27.6%. That would put its quarterly payment at $1.35.

If you were to continue to hold 147 shares of the company, your quarterly payments would be $198.45. On an annual basis, that is nearly $800 per year that you would be collecting from the stock. That would represent 3.2% of your original investment in the stock. The longer you hang on, the higher the potential your dividend income could rise (assuming, of course, that the company remains in a strong financial position and keeps raising its payouts). For instance, if Johnson & Johnson rose its dividend payments by 5% for another 10 years, its quarterly payment would be approximately $1.73; your annual dividend would total more than $1,000.

Obviously, there are a lot of assumptions in here, including that you don't sell any shares of the company. But the important takeaway from this is that if you are patient, investing in a top dividend stock like Johnson & Johnson could pay off significantly over time.

Should you invest in Johnson & Johnson stock?

If you are an income investor looking for some recurring cash flow, Johnson & Johnson can be a great fit for your portfolio. Its dividend looks fantastic and its rate hikes are impressive; many dividend growth stocks just make nominal increases to their payouts to keep their streaks going but Johnson & Johnson is making significant hikes to keep its shareholders happy.

Regardless of what happens with its COVID-19 vaccine and whether it results in a windfall for the company, the business remains strong, posting profit margins of at least 17% in each of the past three years. And that's why for long-term investors, this is a stock you should consider investing in today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.