What You Can Achieve With Dividend Investing, A Johnson & Johnson Case Study

| About: Johnson & (JNJ)

Summary

The first two weeks of trading of 2016 have unnerved many new investors.

At times like these, it is important to stick to your investment strategy.

In this article, I explore why new dividend growth investors should focus on the long haul instead of short-term noise.

Editors' Note, January 22, 2016: The author has revised the table since its original publication.

Dividend growth investing is a long-term strategy but the poor performance of the market is creating doubt in the mind of new investors. If you started dividend growth investing in the last two years or so, you may be wondering if it's still worth it to pursue this strategy.

Since the first trading day of 2015, the S&P 500 is down almost 10 percent so odds are high that your portfolio has underperformed a basic savings account, especially if you were overweight on energy or basic materials stocks. The increasingly bearish environment is not a pleasant situation as it can feel as if all your work has been for nothing.

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Time in the market vs. timing the market

If you're a great market timer, this article isn't for you, but I know myself and I'm terrible at timing the market. I believe time in the market trumps timing the market, an adage that seems to ring true as most individual investors and even professionals consistently underperform the market. Similarly, a performance review of Fidelity accounts revealed that the customers with the best performance were typically either dead or inactive.

At challenging times like these, it can be valuable to zoom out to focus on the big picture. Everyone's strategy is a bit different, but in my eyes dividend growth investing is largely about buying high-quality companies with staying power and excellent cash flow generation. In my case, I want to build a diversified portfolio filled with companies that have a good chance of increasing dividends for many decades to come.

Market corrections can be unsettling but it is important to stay the course despite all the short-term noise. Past performance is no guarantee of future results, but it can be very valuable to study historical market returns to familiarize yourself with possible outcomes. It can be unnerving to see your portfolio value fall below your principal investment, but at times like these it pays to stick to your plan.

If you're still in the accumulation phase, it's important to remember that market corrections can accelerate your future returns. A lower entry price allows you to buy more shares, which results in higher future dividend income. It is impossible to predict what the market will throw at you over the coming months/years, but it's a comfortable thought that a portfolio of quality blue chip stocks is likely to yield more dividend income year after year.

A Johnson & Johnson dividend growth investing case study

To illustrate why it's important to stick to your strategy and not give in to market noise, I'm going to provide a case study of a historical return achieved by a typical high-quality dividend growth stock.

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Image source: Johnson & Johnson

In this article, I'm taking a look at the portfolio of James, a fictitious man who started investing in 1996 when he was 30 years old. James got a job at Johnson & Johnson (NYSE:JNJ) in the early 1990s and was so impressed by the company's operation that he decided to invest a piece of his paycheck in the company's shares.

One important note here is that investing in a single company goes against common investment wisdom as it exposes you to significant company and sector-level risk but the results of this case study are in line with the performance of other popular DGI stocks like Unilever (NYSE:UN) (NYSE:UL), PepsiCo. (NYSE:PEP), Exxon Mobil (NYSE:XOM), P&G (NYSE:PG), etc. Stocks like Coca-Cola (NYSE:KO) and General Electric (NYSE:GE) performed worse, while others like Colgate-Palmolive (NYSE:CL) and the old Philip Morris (NYSE:PM) performed better.

In early 1996, Johnson & Johnson was regarded as a solid blue chip performer, the company had solid earnings growth expectations and was trading at 22.65 times last year's earnings.

We'll assume James started his portfolio with a $1,000 investment on the first trading day of 1996. He saved $1,000 a month for the next 20 years and pooled his fresh cash together with Johnson & Johnson's dividend to make a single investment per quarter on the dividend payout date. To keep things simple, the calculation uses fractional shares and transaction costs were left out of the picture as there's no typical rate.

JNJ dividend growth portfolio case study (split-adjusted data)
Stock price Shares Quarterly investment Dividend per share Forward quarterly dividend income Market value
2-Jan-1996 21.0600 47.4834 1000.0000 0.0825 3.9174 1000.0000
12-Mar-1996 23.5300 175.1467 3000.0000 0.0825 14.4496 4121.2013
11-Jun-1996 25.0000 295.7247 3000.0000 0.0950 28.0938 7393.1165
10-Sep-1996 24.6900 418.3692 3000.0000 0.0950 39.7451 10329.5357
10-Dec-1996 26.2500 534.1690 3000.0000 0.0950 50.7461 14021.9368
11-Mar-1997 29.8100 636.5087 3000.0000 0.0950 60.4683 18974.3246
10-Jun-1997 30.9400 735.4249 3000.0000 0.1100 80.8967 22754.0477
9-Sep-1997 28.8400 842.2522 3000.0000 0.1100 92.6477 24290.5521
9-Dec-1997 32.5000 937.4105 3000.0000 0.1100 103.1152 30465.8427
10-Mar-1998 37.5000 1020.1603 3000.0000 0.1100 112.2176 38256.0106
9-Jun-1998 36.0300 1106.5388 3000.0000 0.1250 138.3173 39868.5926
8-Sep-1998 39.4700 1186.0503 3000.0000 0.1250 148.2563 46813.4034
8-Dec-1998 39.7800 1265.1919 3000.0000 0.1250 158.1490 50329.3352
9-Mar-1999 43.8100 1337.2793 3000.0000 0.1250 167.1599 58586.2077
8-Jun-1999 46.3800 1405.5665 3000.0000 0.1400 196.7793 65190.1756
7-Sep-1999 50.9100 1468.3593 3000.0000 0.1400 205.5703 74754.1712
7-Dec-1999 46.6900 1537.0157 3000.0000 0.1400 215.1822 71763.2654
7-Mar-2000 34.2500 1630.8897 3000.0000 0.1400 228.3246 55857.9716
13-Jun-2000 44.0000 1704.2607 3000.0000 0.1600 272.6817 74987.4706
12-Sep-2000 48.3100 1772.0041 3000.0000 0.1600 283.5206 85605.5159
12-Dec-2000 48.5000 1839.7055 3000.0000 0.1600 294.3529 89225.7173
13-Mar-2001 47.0800 1909.6790 3000.0000 0.1600 305.5486 89907.6884
12-Jun-2001 50.9000 1974.6210 3000.0000 0.1800 355.4318 100508.2109
10-Sep-2001 55.6200 2034.9488 3000.0000 0.1800 366.2908 113183.8540
11-Dec-2001 56.1400 2094.9113 3000.0000 0.1800 377.0840 117608.3182
12-Mar-2002 63.6500 2147.9684 3000.0000 0.1800 386.6343 136718.1857
11-Jun-2002 57.4900 2206.8766 3000.0000 0.2050 452.4097 126873.3350
10-Sep-2002 55.3900 2269.2057 3000.0000 0.2050 465.1872 125691.3039
10-Dec-2002 55.8600 2331.2391 3000.0000 0.2050 477.9040 130223.0177
11-Mar-2003 54.4800 2395.0773 3000.0000 0.2050 490.9908 130483.8117
10-Jun-2003 52.6400 2461.3955 3000.0000 0.2400 590.7349 129567.8603
9-Sep-2003 51.2500 2531.4586 3000.0000 0.2400 607.5501 129737.2555
9-Dec-2003 50.0100 2603.5952 3000.0000 0.2400 624.8629 130205.7968
9-Mar-2004 52.6700 2672.4174 3000.0000 0.2400 641.3802 140756.2230
8-Jun-2004 56.9700 2736.3349 3000.0000 0.2850 779.8554 155888.9978
7-Sep-2004 57.8600 2801.6625 3000.0000 0.2850 798.4738 162104.1913
7-Dec-2004 60.4100 2864.5407 3000.0000 0.2850 816.3941 173046.9045
8-Mar-2005 68.1900 2920.5078 3000.0000 0.2850 832.3447 199149.4253
7-Jun-2005 66.5400 2978.1024 3000.0000 0.3300 982.7738 198162.9322
13-Sep-2005 64.0500 3040.2846 3000.0000 0.3300 1003.2939 194730.2311
13-Dec-2005 60.2500 3106.7294 3000.0000 0.3300 1025.2207 187180.4434
14-Mar-2006 59.2900 3174.6197 3000.0000 0.3300 1047.6245 188223.2039
13-Jun-2006 61.0500 3240.9199 3000.0000 0.3750 1215.3450 197858.1591
12-Sep-2006 63.8300 3306.9601 3000.0000 0.3750 1240.1100 211083.2614
12-Dec-2006 65.5800 3371.6156 3000.0000 0.3750 1264.3559 221110.5515
13-Mar-2007 60.7700 3441.7877 3000.0000 0.3750 1290.6704 209157.4363
12-Jun-2007 61.8300 3511.1823 3000.0000 0.4150 1457.1407 217096.4016
11-Sep-2007 62.0500 3583.0137 3000.0000 0.4150 1486.9507 222326.0023
11-Dec-2007 67.5500 3649.4379 3000.0000 0.4150 1514.5167 246519.5286
11-Mar-2008 62.4400 3721.7396 3000.0000 0.4150 1544.5219 232385.4178
10-Jun-2008 65.6200 3790.9947 3000.0000 0.4600 1743.8576 248765.0715
9-Sep-2008 71.3400 3857.4911 3000.0000 0.4600 1774.4459 275193.4186
9-Dec-2008 57.8100 3940.0797 3000.0000 0.4600 1812.4367 227776.0093
10-Mar-2009 47.7800 4040.8005 3000.0000 0.4600 1858.7682 193069.4463
9-Jun-2009 55.7000 4128.0315 3000.0000 0.4900 2022.7354 229931.3542
8-Sep-2009 60.9200 4210.4795 3000.0000 0.4900 2063.1350 256502.4140
8-Dec-2009 64.3800 4289.1241 3000.0000 0.4900 2101.6708 276133.8082
9-Mar-2010 64.2700 4368.5028 3000.0000 0.4900 2140.5664 280763.6754
15-Jun-2010 59.1400 4455.4248 3000.0000 0.5400 2405.9294 263493.8223
14-Sep-2010 60.5800 4544.6610 3000.0000 0.5400 2454.1169 275315.5634
14-Dec-2010 62.7700 4631.5515 3000.0000 0.5400 2501.0378 290722.4880
15-Mar-2011 58.4800 4725.6185 3000.0000 0.5400 2551.8340 276354.1698
14-Jun-2011 67.1000 4808.3582 3000.0000 0.5700 2740.7642 322640.8353
13-Sep-2011 63.6100 4898.6076 3000.0000 0.5700 2792.2063 311600.4293
13-Dec-2011 63.3600 4990.0250 3000.0000 0.5700 2844.3142 316167.9838
13-Mar-2012 65.3300 5079.4833 3000.0000 0.5700 2895.3055 331842.6472
12-Jun-2012 63.0800 5172.9410 3000.0000 0.6100 3155.4940 326309.1152
11-Sep-2012 68.2000 5263.1975 3000.0000 0.6100 3210.5505 358950.0669
11-Dec-2012 71.1000 5350.5470 3000.0000 0.6100 3263.8337 380423.8900
12-Mar-2013 78.5600 5430.2801 3000.0000 0.6100 3312.4709 426602.8041
11-Jun-2013 84.6900 5504.8163 3000.0000 0.6600 3633.1788 466202.8919
10-Sep-2013 88.5300 5579.7421 3000.0000 0.6600 3682.6298 493974.5652
10-Dec-2013 94.1400 5650.7281 3000.0000 0.6600 3729.4806 531959.5480
11-Mar-2014 93.4900 5722.7089 3000.0000 0.6600 3776.9879 535016.0552
10-Jun-2014 104.1000 5787.8096 3000.0000 0.7000 4051.4668 602510.9846
9-Sep-2014 103.8000 5855.7429 3000.0000 0.7000 4099.0200 607826.1084
9-Dec-2014 108.0500 5921.4441 3000.0000 0.7000 4145.0109 639812.0356
10-Mar-2015 99.5300 5993.2316 3000.0000 0.7000 4195.2621 596506.3427
9-Jun-2015 98.2100 6066.4957 3000.0000 0.7500 4549.8717 595790.5391
8-Sep-2015 93.9400 6146.8647 3000.0000 0.7500 4610.1486 577436.4743
8-Dec-2015 102.4200 6221.1681 3000.0000 0.7500 4665.8761 637172.0359
18-Jan-2016 97.6500 6221.1681 N/A 0.7500 4665.8761 607497.0641
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Throughout his investing career, James was often tempted to call it quits but fortunately he persevered. This was not easy as he encountered a lot of minor setbacks over the last two decades, as well as more major panics, including the Asian financial crisis in 1997, the Russian financial crisis in 1998, the collapse of the Dot-com bubble in 2000, the aftermath of the September 11 attacks, the stock market downturn of 2002, the financial crisis of 2007-2009, the European sovereign debt crisis, the 2010 Flash Crash and the current weak global economic environment.

Besides market risk, James also faced company-specific risk in the form of patent infringement claims, penalties for illegal marketing, and the string of Johnson & Johnson product recalls in 2010.

But despite all of this, the $1,000 a month set aside by James compounded at an impressive rate. James invested a grand total of $241,000 (plus his dividends) and is now sitting on 6,221 shares of Johnson & Johnson. These shares are now worth $607,497.06 and entitle James to an annual dividend of $18,663.50, a yield on cost of 7.75 percent.

The chart below tracks the evolution of the portfolio value since 1996. Due to the use of quarterly data, some of the peaks and lows are filtered out but it's quite surprising how small of a blip the financial crisis already is. The $241,000 ($1,000 + $1,000 a month for 20 years) is now worth over $607,000.

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Dividend growth investing is a long-term strategy; in the beginning, the dividend payouts are relatively small and it's easy to lose focus. At the end of 1996, the forward dividend income of James was just $202.98, hardly something to get excited about.

It really takes a decade or so to really get the ball rolling, afterwards it turns into a real avalanche of dividends. Towards the end of 2006, the forward dividend income of the portfolio exceeded $5,000, and today, James is looking forward to a yearly dividend income in excess of $19,000 (after factoring in next quarter's dividend increase).

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Conclusion

Markets go up and down but as a dividend growth investor, it's important to stay the course. Past performance is no guarantee for future returns, but I believe making monthly investments in quality dividend-paying stocks is a prudent investing strategy. It's easy to get lost in the day-to-day market noise, but as an accumulator, it's important to stick to your strategy. Dividend growth investing requires patience, and if you can stay in the market for the long haul, you will likely be well rewarded.

If you enjoyed this analysis, please click the "Follow" button and check out some of my previous dividend-centric articles:

- Nestlé: 19 years of dividend growth from a Swiss food giant

- Roche: Cancer specialist with 28 years of dividend growth

- Setting the record straight about Unilever's dividend

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.