Johnson & Johnson Is a King of Dividend Safety | The Motley Fool (2024)

Johnson & Johnson (JNJ -0.11%) is arguably one of the safest dividend stocks in the world. The healthcare giant generates durable cash flow and has a fortress-like balance sheet. These features put its 3.4% yielding dividend on a rock-solid foundation.

Here's why those seeking a bankable income stream should invest in Johnson & Johnson.

Backed by the full faith and credit of Johnson & Johnson

Johnson & Johnson is one of only two companies in the world with a AAA bond rating from two or more credit rating agencies; Microsoft is the other. That's better than the U.S. federal government, which only has one AAA rating remaining. The company's prime credit rating means it has an extremely strong capacity to meet its financial obligations.

The company boasts a fortress-like balance sheet. It ended the first quarter with $26 billion of cash and marketable securities against $34 billion in debt. With a mere $7 billion of net debt, Johnson & Johnson has an extremely low leverage ratio. Last year, it generated free cash flow of $18 billion, enough to cover its net debt twice over.

Johnson & Johnson's strong free cash flow is another factor driving the overall safety of its dividend. The company produced $18 billion in excess cash last year after investing $15.1 billion in research and development (R&D), easily covering its dividend outlay of $11.8 billion. That enabled the healthcare giant to return additional money to shareholders by repurchasing $2.5 billion in stock while enhancing its already elite balance sheet.

The healthcare company's top-tier balance sheet gives it the flexibility to make acquisitions to fill gaps in its drug pipeline and enhance its medical technology division. It has done both this year. It agreed to buy Shockwave Medical for $13.1 billion in cash to accelerate its sales growth. The company also closed its $2 billion deal for Ambrx Biopharma to bolster its drug pipeline.

A king among dividend stocks

Johnson & Johnson's strong financial foundation has enabled it to pay a sustainable and growing dividend. The company raised its dividend by 4.2% earlier this year, its 62nd straight year of increasing the payout. That kept it in the elite group of Dividend Kings, companies with 50 or more years of consecutive dividend growth.

The company has delivered very consistent mid-single-digit annual dividend growth over the past decade:

JNJ Dividend data by YCharts

Another great feature of Johnson & Johnson is its higher dividend yield. Its recent level of 3.4% is more than double the S&P 500's current dividend yield of 1.4%. At that rate, Johnson & Johnson would generate about $34 in annual dividend income for every $1,000 invested in its stock. That compares to $14 of dividend income on a $1,000 investment in an S&P 500 index fund. Investors can bank on receiving the company's dividends each year with an extremely high probability that the payout level will keep rising at around a mid-single-digit annual rate.

The company's long-term forecast drives that view. Johnson & Johnson sees operational sales growth of 5% to 7% annually through 2030. That should drive adjusted operational earnings-per-share growth of more than 7% annually at the midpoint of its guidance range. The company expects organic growth and its R&D investments to help drive earnings growth, which it can complement by making accretive acquisitions.

A bankable income stream

Johnson & Johnson has one of the healthiest balance sheets in the world. Combined with its strong and durable free cash flow, the company pays one of the safest dividends in the world. Meanwhile, it has the financial flexibility to continue investing in R&D and making acquisitions to help drive earnings and dividend growth. These features make Johnson & Johnson one of the top stocks for those seeking an extremely safe dividend.