Dividend Kings are stocks that have increased their payouts for 50 years or longer. They are among the best and safest income stocks to hold in your portfolio. Although they don't always provide investors with the highest yields, you're likely to see your dividend income rise from holding these types of investments over the years.
That's why you shouldn't scoff at dividend growth stocks with low yields because those payouts can be deceptively low. A couple of Dividend Kings you won't have to worry about paying low payouts today are Johnson & Johnson (JNJ +0.83%) and Abbott Laboratories (ABT +0.78%). Both pay more than the S&P 500 average of 1.4%, but which one is the better dividend stock to hold?
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Johnson & Johnson has typically paid a higher yield
If you were to buy based on yield alone, you might be tempted to go with Johnson & Johnson as the healthcare giant has for the past five years generally provided investors with the higher payout:
Data by YCharts.
But if you're a long-term investor, you know that the yield only tells part of the story and that it's also important to consider how generous these companies normally are with respect to making rate hikes.
Abbott's high rate of dividend growth comes with an asterisk
Despite paying a lower yield, Abbott has been the more generous company with respect to dividend hikes in recent years:
Data by YCharts.
Over a five-year period, Johnson & Johnson's dividend has increased by an average of 6.1% per year. Abbott's increases average a much higher rate of 12.1%. Should that dividend-hiking pattern continue and the share prices of these two stocks don't change, it would take seven more increases for Abbott's dividend to surpass Johnson & Johnson's.
But that's based on a lot of assumptions. The obvious challenge in predicting future dividends is that the rate of increase can fluctuate greatly. In 2022, for example, Abbott raised its dividend by 4.4%, and a year earlier, it hiked it by 25%. Meanwhile, Johnson & Johnson recently raised its dividend by 6.6% -- a higher rate than Abbott's most recent increase.
What may be a better predictor of future hikes is the free cash flow each business generates.
Free cash flow versus dividends paid
Although there are generally fluctuations in the timing of when cash comes in and flows out, Johnson & Johnson's free cash usually has been much higher than the dividends it has paid out every quarter.
Data by YCharts.
In Abbott's case, the fluctuations have occasionally fallen into the red, with free cash flow not being strong enough to cover dividend payments on its own. And the strong year that the company had in 2020 during the pandemic explains why there was such a generous dividend hike of 25% the following year: Free cash was much higher than normal.
Data by YCharts.
Unless there's a sudden surge in demand for COVID-19 testing, it's not likely that Abbott is going to repeat the strong performance it had in 2020 anytime soon. And that means huge rate hikes will be less probable in the near future.
Dividend investors are better off going with Johnson & Johnson
The only area where Abbott looks to be the better dividend stock is in its dividend growth rate, but that comes with an asterisk as the company made a large increase to the payout one year that inflated that percentage. So it's not reflective of a pattern that looks sustainable over the long term, and that's why the safer income stock is Johnson & Johnson, as it's likely to generate more dividend income for your portfolio over the long term than Abbott.
