Many investors actively seek dividend stocks, and who can blame them? Nothing beats making money while you sleep. But when investing in dividend-paying companies, there is always the risk that these corporations will reduce or suspend their payouts altogether. Choosing the right dividend stocks is arguably the best way to avoid this risk: Not all dividend stocks are created equal.
With that said, let's turn our attention to two companies that are practically passive income machines and will likely continue rewarding shareholders with payout increases for a long time: Johnson & Johnson (JNJ 0.71%) and Apple (AAPL -0.81%).
1. Johnson & Johnson
Johnson & Johnson has a history that dates back more than 100 years. Most businesses struggle to survive a decade, so this feat is highly impressive. It's because J&J offers goods that are always in high demand. It is a leading pharmaceutical company with a diversified portfolio of medicines spanning several therapeutic areas, from infectious diseases to oncology, immunology, neuroscience, and more.
Moreover, Johnson & Johnson spends ample money on research and development and routinely adds new products to its vast portfolio. Drugmakers can cease being relevant if they stop innovating. That is unlikely to happen to this pharma giant. The company's medical devices unit also offers a range of products that physicians use to improve health outcomes for their patients.
Furthermore, Johnson & Johnson records consistent revenue, profits, and free cash flow.
JNJ Net Income (Annual) data by YCharts.
Financial health is essential as no company can sustain dividend increases over the long run without that. And as an added piece of evidence of Johnson & Johnson's financial health, the company boasts an AAA rating from Standard & Poor, a testament to its strong balance sheet. Even if the U.S. Federal Reserve's predicted recession hits us before the end of the year, the healthcare giant should be just fine.
Johnson & Johnson has had to navigate various lawsuits against it in recent years regarding opioids as well as its talc-based baby powder, but these processes will play themselves out eventually. The company has survived plenty of downturns and challenges in its long history.
Finally, Johnson & Johnson has been excellent at hiking its payouts. The drugmaker is a Dividend King. It is currently on its 60th consecutive year of dividend increases. Very few corporations have a better track record. Johnson & Johnson's current 3.03% dividend yield is above that of the S&P 500 at 1.66%.
Although its cash payout ratio of 73% seems high, the company has the tools necessary to continue doing what it has been doing for a long time: slowly and steadily growing its dividend. Investors can sleep easy knowing that Johnson & Johnson's payouts are secure.
Apple isn't in the business of selling medicines. Most of the things it offers are, strictly speaking, goods that can eventually become obsolete. But the company is still an excellent stock to buy and hold forever. Here is why: Apple has built an incredibly strong brand name and a culture of technological innovation.
The company is an expert at transforming existing tech into better and more sophisticated versions of essentially the same thing. Cell phones existed before the iPhone, and AirPods are just fancy earbuds, among other examples. Once branded with its logo, these devices typically command high prices, even though plenty of cheaper substitutes are available. That speaks to Apple's customer loyalty, a powerful competitive edge.
That's why the company reports solid financial results even in challenging economic times.
AAPL Net Income (Annual) data by YCharts.
However, Apple has been seeking to diversify its revenue base. It increasingly relies on its services segment, which offers everything from Apple Cloud, Apple TV+, Apple Music, and much more. This business still makes up a small percentage of its top line, but it has grown in importance. Apple's installed base now stands at more than two billion devices worldwide.
The company should benefit from this for years to come as it finds new ways to monetize its large base of customers. Apple is making headway in fintech and has also been looking to enter the healthcare industry in some way. Turning to the company's dividends, its 0.55% yield is low, but it has raised its payouts by 120% in the past decade. With a very modest cash-payout ratio of 15.3%, there are miles of room left for more hikes.
While not primarily known for its dividends, Apple can give passive income seekers exactly what they want while delivering market-beating returns.