Dividend stocks can be excellent sources of passive income, but there are potential perks for holding them beyond that. For instance, opting into automatic dividend reinvestment plans can help improve those stocks' value as a hedge against inflation.
Of course, past performance isn't a guarantee of future success, but history suggests that investing in strong dividend-paying companies can benefit investors of all types. Two that I see as being particularly worth considering today are Johnson & Johnson (JNJ -1.31%) and Pfizer (PFE -3.31%).
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1. Johnson & Johnson
With a track record of 59 consecutive years of annual payout hikes, Johnson & Johnson has earned a place on the short list of Dividend Kings. And with a solid business, the drugmaker looks set to continue rewarding shareholders with more dividend increases for many years to come.
It is currently going through a transition as it separates its consumer health segment into a stand-alone entity, a transaction it aims to complete by year's end.
While the move will make the company's business less diversified, it will also leave it with stronger revenue growth. Johnson & Johnson's consumer health segment was the least impressive of its business units on that score. Also worth noting, the move will help insulate J&J from numerous lawsuits related to various products within that segment. Meanwhile, its lineup of drugs remains impressive: The company had more than a dozen blockbuster products in 2021.
Image source: Getty Images.
And to help the company cope with the inevitable revenue drop-offs that will come after the patents on those top-selling medications expire, it has an impressive R&D operation as well. J&J boasts 53 late-stage programs in its pipeline. Johnson & Johnson scored about half a dozen regulatory nods in the fourth quarter alone.
In 2021, J&J's sales rose 13.6% to $93.8 billion. That's a solid performance for a pharma giant. Meanwhile, adjusted net earnings grew by 22.2% to $26.2 billion. The company also generated roughly $19.8 billion in free cash flow although that was down by 5.3% from 2020. At its current share price, the stock offers a dividend yield of 2.5% -- better than the S&P 500 average's 1.4% -- and the payout ratio is a reasonable 56%.
Johnson & Johnson looks like an excellent dividend stock to buy and hold through thick and thin.
2. Pfizer
Pfizer's COVID-19 vaccine, Comirnaty, has been highly successful. In 2021, it racked up $36.8 billion in revenue and was the primary reason the company's total revenue for the year rose by 92% to $81.3 billion. That's the kind of top-line growth we'd expect from a much smaller company. Pfizer's adjusted income for the year skyrocketed by 98% to $25.2 billion. It also ended 2021 with $29.9 billion in free cash flow, a year-over-year increase of 121.6%.
Pfizer's coronavirus tailwind isn't over. Management expects revenue of $32 billion from Comirnaty this year along with $22 billion from its COVID-19 therapy, Paxlovid. The drugmaker is guiding for revenue between $98 billion and $102 billion for 2022.
The past couple of years would have been very different for Pfizer had it not been for its coronavirus-related work. Excluding its COVID-19 products, the company's revenue for 2021 grew by just 6% to $44.4 billion.
But Pfizer will undoubtedly look to invest the profits from its COVID-19 line shrewdly. Investors can expect it to shop for promising pipeline programs owned by smaller pharmaceutical companies. Acquisitions of entire companies aren't out of the question, either. And, of course, Pfizer's existing pipeline is already highly promising.
It currently has 89 programs underway, including 27 phase 3 clinical trials. Label expansions and new approvals are routine for Pfizer. And the company generates more than enough money to continue delivering dividend increases. At current share prices, Pfizer's dividend yields 3.2%, and its payout ratio of 29% gives it plenty of room for future increases.
The company has raised its payouts by 25% over the past five years. Pfizer may not be a Dividend Aristocrat, but given the company's solid business and growth prospects, it looks like a stock that income-seeking investors can bank on.
