Dividend investing has proven to be an effective strategy for long-term investors. A significant percentage of the S&P 500's return over the past few decades is based on dividends reinvested and the power of compounding. However, when executing this strategy correctly, it's crucial to pick solid dividend stocks -- those unlikely to cut their payouts even when trouble arises.
Let's consider two that fit the bill: CVS Health (CVS +1.81%) and Johnson & Johnson (JNJ +0.40%). Here's why these two healthcare dividend stocks are worth holding on to forever.
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1. CVS Health
The retail pharmacy landscape has changed significantly. Legacy players in the field are dealing with changing consumer habits while competing fiercely with online retailers. These challenges -- and more -- led to the near collapse of Walgreens Boots Alliance before it was acquired and taken private. However, CVS Health remains a leader in the field. One reason is that the company's business is diversified. True, CVS is a pharmacy leader, but it also has a significant presence in insurance through its subsidiary Aetna.
CVS Health has faced challenges over the past few years, but it is slowly adapting to modern demands while making changes that should help boost margins and the bottom line. For instance, the company offers online pharmacy orders and same-day delivery service. Now, patients can skip the line. Meanwhile, the company has pledged to cut costs over the next few years, and has already made progress.
NYSE: CVS
Key Data Points
There is more to come. The healthcare giant plans to scale back its Medicare Advantage business, the source of much of its margin erosion over the past few years, as it couldn't control rising costs in that unit. While this move will result in lower overall revenue growth, it should boost operating margins.
Meanwhile, CVS still has ambitions to expand its primary care business and has made acquisitions to that end, including Oak Street Health in 2023. The company also launched Cordavis, which will partner with biosimilar drugmakers to lower prices and make medicines more accessible. CVS Health's significantly diversified and complementary healthcare operations make it likely to remain a leader in the field.
Lastly, the company's dividend appears attractive, given its current forward yield of 3.4% -- compared to the S&P 500's average of 1.2% -- and cash payout ratio of 53.3%. CVS Health has not suspended nor cut its dividend, which is a sign of a company capable of offering consistent passive income for a very long time.
2. Johnson & Johnson
Johnson & Johnson has a rare dividend streak. It's a Dividend King -- a stock with at least 50 consecutive years of dividend increases (J&J now has 62). However, some observers wonder how much longer it can keep that up, given the legal and regulatory headwinds it has encountered, including thousands of talc-related lawsuits. It's worth noting, though, that throughout it all, the company has maintained a higher credit rating than the U.S. government, indicating those giving the ratins are confident in the business. It's clearly capable of handling its obligations.
The pharmaceutical giant has a deep lineup that continues to generate decent growth despite other issues, such as patent cliffs. It lost U.S. patent exclusivity for Stelara, an immunology medicine, this year. Revenue and earnings continue to move in the right direction, though. Third-quarter sales came in at $24 billion, 6.8% higher than the year-ago period. Adjusted earnings per share were $2.80, 15.7% higher year over year.
NYSE: JNJ
Key Data Points
Even with the looming threat of drug price negotiations that could affect some of its medicines, Johnson & Johnson's deep lineup across many therapeutic areas -- and its pipeline, which features dozens of programs -- should allow it to overcome the challenges. That's before we even consider its medtech division, which also performs well and should have significant long-term tailwinds, such as its entry into the market for robotic-assisted surgery.
Johnson & Johnson remains capable of sustaining consistent dividend growth, just as it has in the past. The stock is still one of the best picks for dividend-focused long-term investors.
