Entering the stock market doesn't require a huge investment. If after paying all your bills and spending for holiday shopping, you have some extra cash to spare, why not invest it so that you not only have a consistent income but could also see your original investment grow? Dividend-paying stocks are the best option for people who want to keep earning money in a volatile market. And there are no better choices than these two outstanding companies.
The healthcare and consumer-products giant Johnson & Johnson (JNJ 0.29%) is a stable, diversified, and strong company whose growth is commendable. Cannabis-related real estate investment trust (REIT) Innovative Industrial Properties (IIPR 2.21%) gives investors access to a risky sector while paying dividends. Let's dig deeper into how these two have performed this year, and why they are great buys right now.
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1. Johnson & Johnson
Johnson & Johnson is a popular name in the consumer space. Its products, including Listerine, Neutrogena, and Benadryl, are well-known globally. The company's success can be attributed to its vast and diversified business, comprising three segments: consumer health, pharmaceuticals, and medical devices.
Its strong financials have allowed it to become a Dividend King (a company that has increased dividends for at least 50 years in a row) -- in Johnson & Johnson's case, for 59 years. It has a dividend payout ratio of 62%. (Payout ratio reveals whether a company's dividend payments are sustainable; the lower the ratio, the better.) It recently increased its quarterly dividend again by 5% to $1.06 per share.
Its stellar third-quarter results show growth, so investors can be assured that dividends aren't stopping anytime soon. Johnson & Johnson saw increases in business in all three of its segments, with the highest, 14%, in pharmaceuticals. Driven by another strong quarter, the company raised its 2021 guidance.
Management now expects fiscal 2021's adjusted operational sales to grow year over year by 12.9% to 13.5%, and adjusted operational diluted earnings per share to jump 20.2% to 20.8% from the year-ago period, to between $9.65 and $9.70. (Note that the guidance includes sales of the company's COVID-19 vaccine.) All of this indicates another strong year and a probable increase in dividends.
2. Innovative Industrial Properties
Innovative's outstanding stock returns over the last couple of years is the result of being linked to a fast-growing industry -- cannabis. It's a real estate investment trust (REIT) that acquires large properties from cannabis companies and leases the properties back to the growers in a sale-leaseback system. This arrangement provides immediate cash flow to the tenants (the cannabis companies) while also helping the REIT maintain a steady cash flow in rental income.
Rental revenue has driven Innovative's shares to staggering heights. Its weighted-average lease term is 16.7 years, which means investors can be assured of a very steady stream of cash flow over a long period of time. Innovative recorded another stellar third quarter in which revenue jumped 57% year over year to $54 million, while profit grew to $30 million from $19 million in the year-ago period. Its growing adjusted funds from operations (AFFO), a metric similar to free cash flow, allow it to pay consistent dividends. AFFO is a measure of cash available to be paid as dividends . Its AFFO grew 61% year over year to $45 million in Q3.
As a REIT, Innovative is legally required to pay 90% of its taxable income as dividends. The company recently made a 28% year-over-year quarterly dividend hike to a third-quarter dividend of $1.50 per share. This hike is its 12th dividend increase since its initial public offering in 2016.
Some of Innovative's tenants are popular cannabis growers, such as Curaleaf Holdings, Green Thumb Industries, Trulieve Cannabis, and Cresco Labs. All these companies are expanding aggressively, and that means greater revenue opportunities for Innovative.
Both stocks are great buys in a volatile market
Though neither Innovative nor Johnson & Johnson has a sky-high dividend yield, currently at around 2.5% each, both are better than the S&P 500's average of 1.3%.
However, consistency in dividend payments matters when choosing a dividend stock. The fact that both are profitable companies with high growth prospects gives me faith that dividends will keep growing.
Innovative is safe from the volatility of the marijuana market, as it doesn't grow cannabis but still benefits from the growth of this evolving industry. As long as state legalization keeps ramping up, cannabis companies will continue expanding and Innovative will continue to grow.
There is a slight risk in Johnson & Johnson's pharmaceuticals segment, as most of its drugs won't be successful. But its diversified business and the fact that most of its products are noncyclical keeps its revenue surging even in a volatile market.
Recently the company also announced its decision to separate its consumer health segment and create a new publicly-traded company (the name hasn't been disclosed yet). The separation is expected to be completed in 18 to 24 months; Johnson & Johnson will continue to operate as a healthcare company with its pharmaceuticals and medical devices segments.
I think this is a good step. J&J's COVID-19 vaccine is also bringing in huge sales, which stood at $502 million for the third quarter. For the full year, the company expects $2.5 billion in sales from the vaccine, which could be around 3% of its total sales (based on the upper end of its current sales guidance).
Analysts predict 11% and 19% upside for Johnson & Johnson's and Innovative's stocks for the next 12 months. And their shares are trading 7% and 19% off their 52-week highs. This dip creates an opportunity in these exciting stocks before the year ends.
