Buying stocks may not seem all that attractive at the moment. After all, most fixed income assets are currently paying out yields close to historic highs. Investors, though, should bear in mind that high-quality dividend stocks have consistently outperformed most other asset classes over the long term, especially during times of economic uncertainty. Blue chip dividend stocks, in effect, have often been a source of strength for investors in turbulent markets.
Which blue chip dividend stocks are worth buying right now? Coca-Cola (KO -0.16%) and Johnson & Johnson (JNJ 0.41%) both sport rock-solid balance sheets, formidable economic moats, and sterling dividend programs. Read on to find out more about these two no-brainer dividend stocks.
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Coca-Cola: An essential blue-chip
Coca-Cola is easily one of the most recognizable brands in the world today. The company's product portfolio is home to several well-known brands like Sprite, Fanta, and of course, Cola-Cola. Moreover, the beverage giant has an exceptionally strong balance sheet, with over $15.6 billion in cash and equivalents at the end of the most recent quarter. It also generates ample free cash flows, which have averaged $8.79 billion annually over the prior five years. What's more, most analysts expect Coca-Cola's free cash flows to grow modestly next year, despite the softening global economy.
Coca-Cola also rewards its shareholders with a generous dividend program. The company has increased its dividend for 61 consecutive years, making it a Dividend King. It currently pays an annual dividend of $1.84 per share, which translates to a yield of 3.46% at current levels. That's more than double the 1.62% average yield of the S&P 500.
The only major drawback is that Coca-Cola's payout ratio is on the high side at 74.7%.This elevated payout ratio could limit future dividend growth, although the company's remarkable ability to continually grow its free cash flows suggests otherwise.
KO Free Cash Flow (Quarterly) data by YCharts
Johnson & Johnson: A top dividend at a reasonable price
Johnson & Johnson, or J&J for short, is another Dividend King that offers a compelling combination of growth, stability, and income. After spinning off its consumer health business earlier this year, the company's core revenue drivers going forward will be pharmaceuticals and medical devices. Its diverse business model helps it to weather major risk factors, such as patent expirations, regulatory hurdles, and competitive pressures. The company also has a robust pipeline of innovative drugs and medical devices that form the foundation for its substantial competitive moat.
On top of its impressive product portfolio, J&J sports a solid financial position, with over $28.5 billion in cash and equivalents at the end of the most recent quarter. It also produces exceptional free cash flows, which have typically come in at over 20% of annual sales. The healthcare behemoth's enormous free cash flows allow it to invest in pipeline development, capitalize on business development opportunities, and return billions to shareholders in the form of dividends and share buybacks.
Speaking of the dividend, J&J has a long history of dividend growth, having raised its dividend for 61 consecutive years. It currently pays an annual dividend of $4.76 per share, which equates to an annual yield of 3.00%. Like Coca-Cola, J&J's payout ratio of 92.9% is on the high side, but its proven ability to grow sales and free cash flows augurs well for its long-term sustainability. J&J's stock also trades slightly below 15 times projected earnings, which qualifies as a bargain valuation for a blue chip dividend stock.
