As the volatility in the markets increases and investors re-price their risks, one proven strategy to survive in this environment is to focus on companies which have time-tested products and services. Stock prices of these old-economy companies are sure to bounce back once the dust has settled and normal trading patterns resume.
If you’re a long-term income investor with plenty of dry powder on the sideline and were looking for better entry points, this market pullback is a great news. Lower stock prices of some top-quality dividend stocks mean their yields have become more attractive. Keeping this theme in mind, I'm recommending Johnson & Johnson (NYSE:JNJ). In this ongoing volatile trading, investors have seen J&J's share value decline despite the fact that its business is growing and it’s not facing any major threats to its future profitability.
Here's why this pharma behemoth might be a good pick for your portfolio.
Market-Beating Returns
Johnson & Johnson doesn’t get too much financial press because it’s an old, boring stock that rarely surprises investors. But if you analyze how much investors have benefited from having this stock in their portfolios you might be surprised. During the past two decades, this New Brunswick, New Jersey-based healthcare giant delivered a total return of more than 489% to shareholders. To keep things in perspective, the benchmark S&P 500 Index returned just under 288% over the same period.
The biggest advantage of having buy-and-hold stocks in your portfolio is that you don’t need to worry about market ups and downs on a daily basis. You don’t invest in J&J to make a quick buck. All you care about is a consistent income stream that's beating the inflation beast and growing every year.
The dividend is your friend in both good and bad times, as long as the company is able to make their dividend payments during downturns as well as upturns. Increasing payouts make it easier for you to hold on to your investment even when the share price contracts. Investors who made about 500% in total returns while holding on to J&J stock have successfully ridden through many market crashes and bubbles, including the Great Recession of 2008 and the dot-com bubble of 2001.
When it comes to rewarding investors, few companies have done better than Johnson & Johnson. The company has increased its quarterly dividend rate every year for 56 consecutive years. This remarkable performance puts Johnson & Johnson among an elite group known as “dividend kings,” companies with at least five decades of annual dividend hikes. And though its payout ratio of 57.04% could be considered a tad high by some, given the company's strength and stellar dividend history, it should be considered a healthy metric in this case.
Growth momentum
The latest numbers suggest that J&J’s earning momentum is still going strong, and there is no reason for long-term investors to panic. Last month, the company reported that its fourth-quarter sales surged 11.5%, while its net income jumped 9.5% as the company beat analysts expectations.
This strength came from the fact that J&J has one of the biggest R&D budgets in the industry. Since 2015 it has spent more than other large pharma firms on M&A. And the company has done almost twice as many drug-licensing deals as its nearest large pharma competitor over that same period, according to Bloomberg data.
For dividend investors, the current stock price—it closed at $129.67 yesterday—might be a good entry point, following the 7% dip this year. Trading with the forward price-to-earnings (P/E) of just 15, J&J stock is much cheaper now than it was a month ago.
The timing to make the entry seems perfect, especially when management plans to repatriate $12 billion in overseas cash. Analysts are expecting that most of this money will go toward higher dividends or share buybacks.
Over the last five years, J&J has increased the dividend between 5% and 8.1%. Given the new tax code and all that cash, I wouldn't be surprised if the company hits the top of the range when it’s likely to announce its new dividend plan in April.
The bottom line: If your investment objective is to buy solid dividend stocks in order to earn a steady income, you can’t go wrong with J&J. It's one of the biggest dividend distributors in the pharma industry. With a strong balance sheet, cash flows and a dominant market position in consumer healthcare, pharmaceuticals and medical devices, you can rely on Johnson & Johnson’s dividend for years to come.