Is Johnson & Johnson the Best Dividend Stock for You? | The Motley Fool (2024)

Investing comes in many flavors, so there isn't a right or wrong approach: You should do what's best for you. That applies even to dividend investing. For some, dividend investing means maximizing immediate income, even if it requires sacrificing some growth and long-term upside; for others, it's the opposite.

Healthcare juggernaut Johnson & Johnson (JNJ 0.05%) is a hallowed name in the dividend community, both for its brand recognition and for a remarkable dividend-raise streak that's lasted 62 years and counting. But whether the stock should reside in your portfolio depends on a variety of factors.

Here's how to tell whether J&J is the right dividend stock for you.

Quality means you should at least consider owning J&J

Dividend investing is about thinking long-term, so the common denominator in any strategy is to focus on high-quality companies built to stand the test of time. Johnson & Johnson's dividend streak shows that it's done just that.

The company is a conglomerate that operates two primary business units: innovative medicine, the company's pharmaceutical arm; and medtech, which sells medical devices, testing equipment, and more. According to management, approximately 65% of J&J's revenue comes from products with a top-two leadership position worldwide. In other words, Johnson & Johnson products are a primary choice across the healthcare industry.

Combine market leadership with a diverse product portfolio, and you get a business that performs year in and year out:

JNJ Revenue (TTM) data by YCharts.

Steady profits fuel a consistent dividend protected by a healthy 64% dividend payout ratio. In other words, cash flow would need to fall off a cliff for the company to fail to fund its dividend with profits. Even if such a crisis did occur, Johnson & Johnson boasts what may be the world's most trusted balance sheet. It carries a perfect AAA credit rating from the major credit bureaus -- higher than even the credit rating of the U.S. government.

Nothing in life is guaranteed, but Johnson & Johnson's stability in the healthcare sector is arguably as close as you'll come in investing.

Why Johnson & Johnson could be perfect for you

If you're a value-focused investor willing to buy and hold blue chip companies, you can't do any better than J&J. However, the company has become so large that growth has slowed; analysts believe earnings will grow by just 5% to 6% annually over the long term, which, combined with a solid 3.3% dividend yield right now, would give you a shot at 8% to 9% annual total returns. That won't make you rich overnight, but it can add up when it compounds for decades, and Johnson & Johnson might be the most durable business on Earth.

Valuation is crucial when buying a stock with slower growth, so this one is sometimes best left alone if the price isn't right. But at the moment it's trading near 52-week lows. Its forward price-to-earnings (P/E) ratio is just 14, its lowest in several years. If you want to "buy it and forget it," J&J is for you, and the stock is particularly attractive today.

Why Johnson & Johnson might not be for you

There's nothing wrong with a steady annual investment return of 8% to 9%. After all, that's a hair below the S&P 500's historical average. That said, if you're young or have an appetite for more risk you might look for alternatives with more upside, even if that means enduring more volatility.

J&J has trailed the S&P 500's total returns by a wide margin for the past decade. In recent years, S&P 500 index funds, which have also historically proven safe moves, have done far better. But Johnson & Johnson is a remarkable business, and its appealing valuation could set you up for higher returns than you might have seen over the past decade.

Ultimately, those looking for the most dependable investments possible will gravitate toward Johnson & Johnson, while those comfortable with more risk will probably look elsewhere. It comes down to personal preference -- part of what makes investing great for everyone.