The continued bear market in stocks has a silver lining. Stock prices and dividend yields move in the inverse direction. So, with stock prices falling, dividend yields are on the rise. That's enabling income-focused investors to lock in higher yields on high-quality dividend stocks they already own to boost their passive income from those positions.
Johnson & Johnson (JNJ -0.15%) and Prologis (PLD 0.58%) are great stocks to double up on right now for those with a low allocation to these leading dividend payers. Meanwhile, investors who don't own them yet should consider adding them to their portfolio. Here's why they're compelling options for income-seeking investors these days.
A two-for-one special
Johnson & Johnson offers a dividend that yields around 3% following a roughly 15% slide in the share price since the bear market began in early 2022. That's nearly double the roughly 1.7% dividend yield of the S&P 500. The company has an elite track record of increasing its dividend. It gave investors a 5.3% raise earlier this year, its 61st consecutive year of dividend growth.
The healthcare behemoth's above-average payout might be one of the safest in the world. The company boasts a AAA bond rating, tied for the highest in the world and higher than the U.S. Government. The company backs that elite credit rating with a rock-solid balance sheet. The $414 billion company by market cap only had $20 billion of net debt at the end of the first quarter ($53 billion of total debt offset by $33 billion in cash and marketable securities).
Meanwhile, the company generates tremendous free cash flow. Johnson & Johnson produced a prodigious $17 billion in free cash in 2022, easily covering its $11.7 billion dividend outlay. That enabled it to generate excess cash to repurchase shares ($2.5 billion in 2022) and maintain its elite financial profile.
The company's financial strength enables it to continue investing in its growth. It spent $14.6 billion on R&D last year. It also paid $16.6 billion in cash to acquire Abiomed to bulk up its medical technology (MedTech) portfolio.
A final factor that makes Johnson & Johnson such an attractive dividend stock is the upcoming spin-off of its consumer healthcare business Kenvue (KVUE -0.60%). The company recently completed an initial public offering of Kenvue and expects to spin that business off to shareholders later this year. Kenvue expects to pay a quarterly dividend with a yield of around 3.7%. That makes buying Johnson & Johnson right now a two-for-one special for dividend investors.
A rapidly rising payout
Prologis' payout currently yields almost 2.9%. The company's dividend yield has risen over the past 18 months, driven up by a nearly 30% decline in the share price during the bear market and a couple of sizable dividend increases. The industrial REIT boosted its dividend by 25% last year and another 10% in 2023.
The warehouse operator has done a fantastic job growing its dividend. The REIT has increased the payout at a 12% compound annual rate over the last five years, double the growth rate of the S&P 500. Meanwhile, it has delivered 15% compound annual dividend growth since its IPO, ranking it 13th best in the S&P.
Prologis should be able to continue growing its dividend at an above-average pace. The company has enormous embedded growth. Warehouse rents have risen rapidly in recent years due to robust demand. However, Prologis has yet to capture the full impact of rising rents because of its long-term leases. The company expects its rental income to grow by 8% to 10% per year over the next several years as legacy leases expire and it rolls rents to higher market rates. That provides "visibility to future income and dividend growth," according to comments by CFO Tim Arndt on the first-quarter earnings conference call.
The company generates significant post-dividend free cash flow. It also has an A-rated balance sheet with low-cost, long-term, fixed-rate debt. Those factors give it lots of financial flexibility to continue expanding its portfolio by making accretive acquisitions and investing in value-enhancing development projects. Those investments will provide incremental earnings growth to support a rising dividend.
High-quality dividend stocks on sale
Johnson & Johnson and Prologis have seen their share prices take a hit during the current bear market. That has helped push up their dividend yields to more attractive levels, and they're really attractive options for income-seeking investors right now. The companies offer incredibly safe payouts that should keep rising in the future.
