Shares of Johnson & Johnson (JNJ -0.46%), Altria Group (MO -0.37%), and stocks in general recently received a boost from the Federal Reserve, which appears unmotivated to raise interest rates in the near term. Despite the recent lift, these magnificent dividend stocks are still way down over the past year
At their beaten-down prices, these stocks offer above-average yields and that isn't all they have in common. Both of these high-yield stocks are underpinned by excellent businesses that appear poised to steadily deliver a growing portion of their profits to patient investors.
Image source: Getty Images.
Here's why you could regret not taking advantage of their beaten-down prices.
Johnson & Johnson
If you're like most Americans, you know a few people who've had a knee replacement, but you probably don't realize how many of those new knees were sold by DePuy Synthes, a Johnson & Johnson subsidiary. The company recently reported that medical technology sales that rose 10% year over year to $7.5 billion in the third quarter.
Once a hospital trains its surgeons to use a Johnson & Johnson product, retraining them to use a competitor's is a huge expense that administrators would rather avoid. In addition to switching costs that benefit its medtech segment, Johnson & Johnson's pharmaceutical segment gets all kinds of pricing power from patent-protected market exclusivity. For example, sales of Darzalex, a multiple myeloma treatment that first earned approval from the U.S. Food and Drug Administration (FDA) in 2015, are on pace to reach $10 billion this year.
At recent prices, shares of J&J offer a 3.1% yield, which is much better than wht most dividend payers offer. The average dividend-paying stock in the Dow Jones Industrial Average offers a yield of just 2.1% at the moment.
Earlier this year, Johnson & Johnson spun its consumer-goods segment off into a new company named Kenvue. Now that it's focused on medical technology and pharmaceuticals, faster-than-usual growth could follow. Management expects more than $10 per share in adjusted earnings this year, but its dividend payout is set at just $4.76 per share annually.
With plenty of wiggle room to make payout increases in the near term and advantages that could help earnings grow all the way through the decade ahead, this stock is a screaming buy.
Altria Group
If you aren't concerned about your portfolio's ESG rating, consider Altria Group (MO -0.37%). Shares of the company that markets Marlboro brand cigarettes in the U.S. offer a huge 9.6% dividend yield at recent prices.
Huge dividend yields usually mean there's concern about the underlying business's ability to grow earnings. Steadily declining cigarette sales are why investors are nervous about Altria Group, but they probably shouldn't be. The company has raised its dividend payout 58 times over the past 54 years.
I've listened to investors complain about smoking's declining popularity for decades, but this complaint ignores how easy it is to raise prices on packs of Marlboros. In the third quarter, Altria estimates that domestic cigarette industry volume decreased by 8% year over year. But Altria reported third-quarter revenue net of excise taxes that decreased just 2.5% year over year, thanks to price increases and rising sales of non-combustible products.
Marketing regulations make it impossible to develop new cigarette brands, so we can reasonably expect price increases to offset declining volume for at least another decade. Altria is also taking steps to ensure customers who give up combustible cigarettes keep using its nicotine-delivery products. In June, Altria completed a $2.75 billion acquisition of NJOY Holdings, which is the only company with FDA authorization to market a line of pod-based e-vapor products.
Declining cigarette volumes didn't stop Altria Group from more than doubling its dividend payout over the past decade. Despite the rapid raises, it needed less than 80% of the free cash flow it generated over the past year to meet its dividend commitment. Buying some shares now to hold for at least 10 years looks like the right move.
