What's better than stocks with a strong dividend? That's an easy question. The answer: Stocks with a strong dividend and share price that have excellent prospects to grow.
We asked three Motley Fool contributors to identify dividend growth stocks that are great picks to buy in July. Here's why they chose Abbott Laboratories (ABT -0.24%), AbbVie (ABBV 1.19%), and Johnson & Johnson (JNJ 0.47%).
A Dividend King to buy on the dip
David Jagielski (Abbott Laboratories): If you're looking for a dividend growth stock to buy and hold, you shouldn't overlook a company's track record. This is where Abbott Laboratories shines. The company has been paying dividends for nearly a century, with its initial payments going back to 1924. And for the past 50 years, it has also been consistently increasing its dividends, making it a Dividend King.
Abbott's dividend yield of 1.8% is a little higher than the S&P 500 average. But investors could easily be collecting more on their initial investment by just buying and holding the stock. In five years, Abbott has increased its dividend payments by 77%, averaging a compounded annual growth rate of 12%.
Its most recent rate hike was a 4.4% bump. If the company were to continue to grow its dividend at that rate, it would take approximately 16 years for the stock's payouts to double. Abbott has plenty of room to continue growing its dividend. In each of the past four years, its free cash flow has been $4.5 billion or higher -- its annual dividend payments currently cost Abbott $3.2 billion.
The company generates revenue from four segments: Diagnostics, medical devices, pharmaceuticals, and nutrition. All of those business units delivered growth of at least 8% last year. This diversification makes Abbott a resilient business to invest in.
Abbott's shares are down more than 22% this year, performing only slightly worse than the S&P 500. But historically, Abbott has been a low-volatility investment that provides investors with stability. The healthcare stock recently hit a new 52-week low and could be a solid buy on the dip.
Keeping it in the family
Keith Speights (AbbVie): I agree with David's optimism about Abbott. My pick sort of keeps it in the family. AbbVie was part of Abbott until 2013. Thanks to this history, it also ranks as a Dividend King.
AbbVie and Abbott have been neck-and-neck in boosting their dividends since the spin-off. However, AbbVie holds a small advantage with a cumulative 252% dividend increase during the period. But its dividend yield of more than 3.7% is a lot juicier than Abbott's yield.
In addition, AbbVie has easily beaten its parent company based on stock performance. Over the past five years, its shares have soared 120%. AbbVie hasn't slowed down this year. It was one of the top three best Dividend Aristocrats (S&P 500 members with at least 25 consecutive years of dividend increases) in the first half of 2022.
I think that AbbVie will be able to continue increasing its dividend for a long time to come. And I also expect that the pharma stock will be able to deliver market-beating gains over the long run.
Granted, AbbVie faces the loss of U.S. exclusivity for Humira next year. That's especially problematic because Humira is the company's top-selling drug right now. However, AbbVie has long planned for this scenario. It already has two successors to Humira on the market that could together surpass Humira's peak annual sales level within a few years.
Importantly, the anticipated sales decline for Humira is already largely baked into AbbVie's share price. The stock trades at less than 11 times expected earnings despite its big gains this year. AbbVie still looks like a dividend growth stock that can make investors richer over the next decade and beyond.
There's no ceiling in sight for this dividend
Prosper Junior Bakiny (Johnson & Johnson): Dividends are great. Who doesn't enjoy getting some passive income? However, some dividend stocks are better than others. Consider pharma giant Johnson & Johnson. Although some companies decreased or suspended their payouts in 2020 following the pandemic-caused recession, J&J did not. The healthcare giant has raised its payouts by nearly 35% over the past five years.
Zooming out helps give even more perspective. Johnson & Johnson is a member of the (very) exclusive group of Dividend Kings. It has increased its payouts for 60 consecutive years. Johnson & Johnson's business is rock solid. Multiple blockbuster products, a solid pipeline, a strong balance sheet, and several potential long-term tailwinds are some reasons why the drugmaker could be an excellent long-term play.
One area in which Johnson & Johnson is well-positioned to rise in prominence is the robotic-assisted surgery (RAS) market, thanks to its device, Ottava. The RAS space is heating up. Robotic surgeries still make up only a tiny percentage of total procedures worldwide. However, they help perform minimally invasive surgeries that offer important benefits compared to traditional open surgeries, including faster recovery time for patients.
The world's aging population will also be a driver for Johnson & Johnson's business. People need more medical care, including innovative life-saving therapies and surgeries, as they age. While Johnson & Johnson will spin off its consumer health unit next year, its two remaining segments -- which generate stronger sales growth -- are capable of helping it deliver robust financial results regularly.
With a solid business backing it, Johnson & Johnson's dividend is safe and should continue growing. The company's cash payout ratio of 56.55% is reasonable. Its dividend yield of 2.53% is above-average. The stock should be poised for faster growth after the 2023 spin-off of J&J's consumer health unit. Income-seeking investors can't go wrong with this drugmaker, in my view.
