Dividends can be a reliable way to generate passive income. However, not all companies have the financial fortitude to maintain their dividends during tough times. That's why investors need to ensure the companies paying them dividends can sustain those payouts over the long haul.
One way to measure a dividend's risk is to examine the underlying company's bond rating. Companies with higher bond ratings have a lower risk of reducing their dividends during an economic downturn. Johnson & Johnson (JNJ -1.15%) and Microsoft (MSFT -2.45%) currently have the best credit in the world, meaning Investors can bank on their dividend payments.
A very healthy dividend
Johnson & Johnson has one of the healthiest financial profiles in the world. The healthcare giant ended last year with $24 billion of cash and marketable securities against $40 billion of debt. That put its net debt at around $16 billion. It's an easily affordable level for a company that produced $17 billion of free cash flow last year. That fortress-like balance sheet is why Johnson & Johnson has AAA-rated credit, higher than that of the U.S. government.
Johnson & Johnson's robust free cash flow easily covers its dividend, which yields 2.8% these days. The company paid $11.7 billion of dividends last year. That allowed it to generate excess cash, some of which it used to repurchase shares (about $2.5 billion last year).
The company has an exceptional track record of paying dividends. Last year was its 60th straight year of increasing its dividend. That puts Johnson & Johnson in the elite group of Dividend Kings, companies with 50 or more years of dividend growth.
The healthcare company invests heavily in research and development ($14.6 billion in 2022) to drive future growth. It also uses its strong balance sheet to make acquisitions as opportunities arise (it bought Abiomed for $16.6 billion in cash last year). The company's growth-related investments should expand its cash flow, enabling Johnson & Johnson to continue increasing its rock-solid dividend. That makes Johnson & Johnson stock a great investment for those seeking an ultra-low-risk dividend.
A cash flow machine
Microsoft sits alongside Johnson & Johnson as the only two companies with better credit than the U.S. Government. The tech behemoth backs that top-tier bond rating with an elite balance sheet. It ended last year with nearly $100 billion of cash, equivalents, and short-term investments. Meanwhile, Microsoft only had about $44 billion of long-term debt.
The technology titan also produces prodigious cash flows. Over the last six months, it generated over $34 billion of net cash from operating activities. That was more than three times its dividend outlay during that period ($9.7 billion). That enabled Microsoft to repurchase shares ($11 billion in the last six months) and make new investments and acquisitions ($13.5 billion in that timeframe).
Microsoft is one of the largest dividend payers in the country, distributing about $18 billion to its shareholders each year. Despite that sizable payout, it has a relatively low yield (less than 1%). However, the company has a solid history of growing its dividend. Microsoft increased the payout for the past 13 years, including by 10% late last year.
The tech giant should be able to continue growing its payout in the future. Microsoft is investing heavily to expand, including making several large-scale investments and acquisitions. It's recently extended its partnership with OpenAI (the developer of the popular ChatGTP AI program) by making a multiyear, multibillion investment into the company to accelerate its innovation. Microsoft is also working to acquire videogame maker Activision Blizzard (ATVI) for $68.7 billion in cash to expand its Xbox platform. Those growth drivers make Microsoft stock a potentially rewarding investment for those seeking a supremely sustainable and growing dividend.
Super safe dividend stocks
Microsoft and Johnson & Johnson offer the lowest-risk dividends around. The companies have fortress-like balance sheets and generate substantial cash flows, putting their payouts on an extremely firm foundation. They're ideal dividend stocks for even the most risk-wary investor.
