Dividend stocks are the best way to invest if stock market volatility scares you away from investing your hard-earned money. And not just any dividend stocks, but Dividend Kings -- companies that have increased their dividend for at least 50 years in a row -- would be a safe bet for investors in such a market scenario.
The two companies I'll be discussing in this article are longtime dividend payers in the consumer and healthcare industries. Both Procter & Gamble (PG -0.78%) and Johnson & Johnson (JNJ -0.46%) have earned the title of Dividend King. These companies have survived many downturns and will most likely survive more. However, only one of them has an edge over the other with long-term growth prospects.
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The case for Procter & Gamble
Procter & Gamble is known globally for brands such as Pampers, Tide, and Gillette. P&G has consistently increased its dividend over the last 66 years, illustrating its stability in the face of market volatility.
In April, the company increased its quarterly dividend again by 3% year over year to $0.94 per share. This marked its 67th dividend increase.
Investors are concerned that rising inflation will have an impact on consumer spending. However, despite inflationary pressures, P&G had a strong fiscal 2023 finish. In the fourth quarter of fiscal 2023 (ended June 30), net revenue increased 5% year over year to $20.6 billion. The company's diluted earnings per share (EPS) rose 13% to $1.37.
The credit could be given to P&G's diverse business model that has allowed it to stay stable for years and return wealth to shareholders. The company generated $14 billion in free cash flow (or 95% of its net earnings) for the fiscal year, allowing it to pay out $9 billion in dividends. In addition, the company ended fiscal 2023 with a sizable cash balance of $8.2 billion.
Management anticipates that macroeconomic headwinds such as rising costs will persist in fiscal 2024.
Yet the company expects free cash flow to be around 90% of net earnings for the entire year. This will allow it to pay out $9 billion in dividends and repurchase $5 billion to $6 billion in common stock. In addition, the company anticipates a 3% to 4% increase in revenue over the previous fiscal year. Diluted EPS could increase by 6% to 9% over last year.
The case for Johnson & Johnson
Johnson & Johnson's consumer brands have a worldwide following. However, the company decided to spin off this segment in 2021 to focus more on its core pharmaceutical and medical technology businesses.
J&J's pharmaceutical division produces an extensive variety of drugs, including immunology and cancer therapies. The pharmaceuticals segment alone generated $52.5 billion in sales by 2022. The segment accounted for 53% of total sales in the most recent second quarter.
J&J's immunology drug Stelara has been a global success, with total sales up 8% year over year to $2.8 billion in Q2. Tremfya, which is used to treat adults with moderate-to-severe plaque psoriasis, increased sales by 18% year over year to $706 million in Q2.
Erleada (for the treatment of prostate cancer) and Darzalex (for the treatment of multiple myeloma) together added $3 billion to total revenue in Q2. Furthermore, sales of the COVID-19 vaccine totaled $285 million.
Total revenue surged 6.3% year over year to $25.5 billion in Q2. The company's adjusted net profit rose to $7.3 billion, up from $6.9 billion in the prior year's quarter.
J&J is also rapidly expanding its MedTech segment, which could be an important catalyst for growth in the coming years. With its Ottava system, it has already entered the robotic surgery market. Over the next several years, the global robotics market is expected to grow at a compound annual rate of 10%, reaching $17 billion by 2031.
It also acquired Abiomed, a provider of cardiovascular medical technology, last year, which contributed 4.6% of total segment sales in the most recent quarter.
For 61 years, Johnson & Johnson has increased its dividends, illustrating its dedication to keeping its business stable. J&J had $5.4 billion in free cash flow at the end of the quarter, which is adequate to cover future dividend payments.
The company's talc litigation issues may make this healthcare stock a little volatile right now, but its business is in a solid position and will remain an excellent growth and income stock.
Which is the better buy?
P&G and J&J are both excellent choices for income investors. Both have higher dividend yields than the S&P 500's average yield of 1.6%. However, if I had to choose one, I would go with Johnson & Johnson.
P&G has done well in business for many years. However, it is a consumer company that is vulnerable to macroeconomic headwinds such as inflation (impacting consumer discretionary funds). Healthcare, on the other hand, is a necessity and is J&J's dominant business.
JNJ Revenue (Quarterly) data by YCharts.
And healthcare and biotechnology are defensive sectors. Regardless of the economic scenario, there will always be a demand for healthcare products due to the aging population. The chart above shows how steadily J&J has increased its revenue and profits in the last decade amid the market ups and downs.
The company will be able to focus on its core business now that it has begun the spinoff process for its consumer segment. It continues to invest heavily in research and development, which totaled $3.8 billion, accounting for 14% of sales in Q2, to bring more innovative products to market. The stock is currently reasonably valued, making it an excellent time to buy before the spinoff is completed.
