For more than 127 years, investors have turned to the iconic Dow Jones Industrial Average (^DJI 0.40%) as a barometer of Wall Street's health. Since its inception in May 1896, the Dow Jones has evolved from an industrial stock-dominated index of 12 companies into one with 30 diverse, time-tested, and historically profitable components.
If there's one thing that's fairly common among Dow stocks, it's their penchant for paying dividends. Only three out of 30 Dow stocks aren't doling out a regular payout to their shareholders. According to a report released 10 years ago by JPMorgan Chase, dividend stocks have a rich history of handily outperforming companies that don't pay a dividend over multidecade stretches.
But even among the 27 Dow stocks currently paying a dividend, they're not all equal. A handful of Dow components are Dividend Kings -- public companies that have increased their base annual payout for at least 50 consecutive years. Among these handful of Dividend Kings are two Dow stocks that are historically cheap and ripe for the picking by opportunistic investors.
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Johnson & Johnson
The first Dow Dividend King that stands out as exceptionally cheap is healthcare conglomerate Johnson & Johnson (JNJ -0.46%), which is better known as "J&J." J&J has increased its base annual payout for a jaw-dropping 61 consecutive years and is currently dishing out a 3.1% annual yield.
The biggest headwind for Johnson & Johnson is the litigation it's facing concerning its now-discontinued talcum-based baby powder. J&J is facing around 100,000 lawsuits that allege its baby powder causes cancer. The company has attempted to settle these claims (without admitting guilt) on two occasions, but both settlement attempts were thrown out in court. The overhang of an unknown financial liability has pushed J&J nearly 20% below its all-time high.
While any sort of litigation or settlement is bad news in the very short-run for Johnson & Johnson, this is a company whose balance sheet can easily handle adversity. J&J is one of only two companies -- Dow component Microsoft being the other -- to be bestowed with the highest possible credit rating (AAA) from Standard & Poor's, a division of the more familiar S&P Global. With more than $28 billion in cash and cash equivalents on hand, J&J should have no trouble covering the liability of any agreed-upon settlement.
Another reason Johnson & Johnson is such a juggernaut in the healthcare space is its ongoing shift toward pharmaceuticals. Brand-name drugs boast high margins and give J&J exceptional pricing power. With more than half of its net sales deriving from pharmaceuticals, J&J has been able to sustain a mid-to-high single-digit earnings growth rate.
Although novel drugs have a finite period of sales exclusivity, Johnson & Johnson has tricks up its sleeve to ensure continued growth while avoiding potential patent cliffs. It's investing aggressively in internal research, has forged a number of fruitful collaborations, and hasn't been afraid to make an acquisition from time to time. It also has a world-leading medical technologies segment that could see its growth accelerate as patient access to preventative care improves and the global population ages.
Johnson & Johnson's management team deserves credit as well. You can count the number of CEOs J&J has had on two hands since its founding in 1886. Long-tenured CEOs help ensure that strategic initiatives are being properly implemented from start to finish.
Best of all, Johnson & Johnson is historically inexpensive. Following the spinoff of its consumer health unit Kenvue, shares of J&J can be purchased for just 14 times forward-year earnings. That's the cheapest Johnson & Johnson has traded, relative to its forward earnings, in at least 10 years.
Image source: Coca-Cola.
Coca-Cola
The other Dow Dividend King that's ripe for the picking by opportunistic investors is beverage stock Coca-Cola (KO). Coca-Cola has also increased its base annual payout for 61 consecutive years, with its yield currently clocking in at 3.4%.
Coca-Cola stock has fizzled out in recent weeks due to glucagon-like peptide-1 (GLP-1) drugs from Novo Nordisk (NVO 0.84%) taking the world by storm. GLP-1 receptor agonists cause the stomach to empty more slowly, as well as signal to the brain that there's still food in the stomach. In other words, Novo Nordisk's next-generation GLP-1 therapies (Ozempic, Saxenda, and Wegovy) could be responsible for helping people lose weight. This is perceived as a potentially negative development for soft-drink makers like Coca-Cola.
However, Coca-Cola has faced an abundance of headwinds before and come out a stronger business every time. While it's never going to be the growth company it was decades ago, Coca-Cola is still capable of moving the needle in the right direction for patient income and value seekers.
Geographic diversity is one factor Coke undeniably has working in its favor. With the exception of Cuba, North Korea, and Russia, it has ongoing operations in every other country. This diversity gives it the ability to generate highly predictable cash flow in developed markets, while leaning on faster-growing emerging markets for much of its organic growth.
In addition to a well-diversified geographic profile, Coca-Cola's marketing team is second to none. Coke is one of the world's most-recognized brands, and its products have been plucked off store shelves by consumers more than any other brand for 10 years running, according to Kantar's "Brand Footprint" report.
Coca-Cola is leaning on digital advertising and artificial intelligence (AI) to tailor ads to reach younger consumers. Meanwhile, it still has well-known brand ambassadors and its prior holiday connections that allow it to connect with more mature audiences. Few companies can so easily engage such a broad range of consumers.
This is probably a good time to mention that food and beverages are basic necessities of life. Regardless of how well or poorly the U.S. and global economy perform, Coke's cash flow is unlikely to be materially impacted.
Shares of Coca-Cola can be purchased by value-seeking investors for a little north of 19 times forward-year earnings right now. For context, this is the cheapest the company's shares have been, relative to forward earnings, since 2013.
