What makes a good dividend stock? The answer depends a bit on who's looking, of course. But there are some general themes that can be drawn out by looking at Johnson & Johnson (JNJ -0.17%) and Medtronic (MDT 0.17%). Here's what you need to know, and why these two stocks fit the bill.
Johnson & Johnson is a Dividend King
One key theme that runs through the two examples here is consistency. On that score, Johnson & Johnson has the best track record, with over six decades' worth of annual dividend increases. It's a member of the highly elite group of companies known as Dividend Kings.
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That alone isn't enough to make J&J worth buying. It also happens to have a large and generally well-positioned business, diversified across medical devices and pharmaceuticals. Research and development (R&D) and marketing are also major strengths for this industry-leading business.
All of that is still not enough to make Johnson & Johnson worth buying. The final piece of the story is the dividend yield, currently 3.4%. That compares favorably to the 1.3% yield of the S&P 500 (^GSPC 0.55%) index and the roughly 1.8% yield of the average healthcare stock. It also happens to be near the high end of its historical yield range, which hints that J&J is attractively priced today.
The problem is that Johnson & Johnson is dealing with a huge class-action lawsuit over talcum powder that will eventually be resolved, but that has also left investors in something of an information deficit. Some won't want to step aboard until this period of uncertainty is over, given that management can't talk about the suit in any detail. However, for investors who can handle a bit of uncertainty, J&J has all the hallmarks of a good dividend stock.
Medtronic is closing in on Dividend King status
Medtronic has increased its dividend annually for 48 consecutive years, which is two years shy of the 50 needed to be named a Dividend King. The company is one of the largest medical device makers on the planet. Like Johnson & Johnson, Medtronic has impressive R&D and marketing chops and is a key supplier to the healthcare industry.
Medtronic's dividend yield is roughly 3.2%, which is attractive relative to the broader market and the broader healthcare sector. It also happens to be near the high end of the stock's historical yield range, suggesting the device maker is attractively priced today.
As with Johnson & Johnson, there's a reason for Medtronic's high yield. In this case, Medtronic had a period where R&D wasn't producing new innovations, and growth has slowed recently. Those two factors appear to be changing: New products are finally coming to market (innovation tends to be lumpy, so this is actually normal), and management is reworking the business to focus on its most profitable and strongest-growing lines. If Johnson & Johnson's legal black box is too much for you, Medtronic will probably be much more attractive.
Balancing the good and bad with dividends
You can easily find great dividend stocks, but they often have low yields because Wall Street is well aware of their success. To be a good dividend stock usually also requires the yield to be attractive, which is the case with both Johnson & Johnson and Medtronic.
That said, high-yield stocks usually have something about them that looks like a problem. Whether or not such a stock is good for your dividend portfolio will likely depend on the problem. For Johnson & Johnson, the big unknown is the lawsuit, which may put off some investors. For Medtronic, the issue is slow growth, a dynamic that appears set to change.
Both are good companies with above-average yields. Which one is a good dividend stock for you will depend on the amount of uncertainty you can handle.
