Johnson & Johnson (JNJ) announced their 50th consecutive dividend increase on April 26. The dividend was increased 7% from $0.57 per share to $0.61 per share. The next quarterly dividend is payable on June 12 to shareholders of record as of May 29, 2012. The new dividend represents an annual payment of $2.44 per share. This represents a yield of 3.75% based on the stock's closing price of $65.10 on Monday, April 30.
I compared this dividend rate to some other benchmarks with very interesting results. Bloomberg.com quoted the US 10-year Treasury bond as yielding 1.92% on April 30. Double this amount would be 3.84%, therefore, Johnson & Johnson is paying a dividend yield that is nearly double the supposedly "risk free" rate of return of the U.S. 10-year Treasury bond. The U.S. government's credit rating was downgraded from AAA to AA+ by Standard and Poors (S&P) during August 2011, while Johnson & Johnson maintained its AAA credit rating (as mentioned in the company's latest annual report). The company has a higher credit rating than the U.S. government based on S&P, but U.S. government interest rates are lower than the J&J dividend.
Comparisons of the company's dividend yield to U.S. government interest rates becomes even more profound when one ventures further out on the yield curve to long term bonds. The U.S. 30-year bond was quoted by Bloomberg as yielding 3.12% on April 30, so Johnson & Johnson's dividend yield is 62 basis points higher or approximately 120% of this key interest rate. You could loan the U.S. government money for 30 years at 3.12% or you could buy the common stock of J&J and receive a 3.75% current dividend yield.
The Vanguard S&P 500 ETF (VOO) had a SEC dividend yield of 2.02% as of April 30. Johnson & Johnson yields 185% of the S&P 500 yield based on this ETF, or nearly double the S&P 500 yield. The Vanguard Long-Term Corporate Bond ETF (VCLT) had a SEC interest rate of 4.84% as of April 27, 2012 (latest available data). Investors could choose a basket of long-term corporate bonds yielding 4.84% (with only 1.7% of assets in AAA credit rated bonds at March 31, 2012) or they could choose Johnson & Johnson equity with approximately 1.1 percentage points lower yield. While the bond yields are fixed, the company's dividend is likely to continue increasing, as it has done for 50 consecutive years. Is this worth the 1.1% spread in yields?
These statistical comparisons indicate to me that the company's dividend yield represents value when compared to other equity and debt benchmarks. While this is also indicative of a company with significant challenges, including product liability lawsuits, consumer product recalls and the uncertainties of a business based on intellectual property, the yield is compelling to me as a dividend investor. The challenges can be balanced with the company's long track record of success and their position as one of the bluest of the blue chips and a component of the 30-stock Dow Jones Industrial Average.
My investment strategy is a balance between investment income and long-term capital gains. I am reluctant to invest in bonds with such low interest rates, and many equities do not pay an adequate dividend. Johnson & Johnson appears to be a solid investment candidate for my strategy because of the relatively high dividend yield and the decent long-term growth prospects (see my previous article on 7 arguments for upside potential).
Investors must perform their own due diligence on whether Johnson and Johnson is a suitable investment for their portfolio, but the dividend yield is definitely attractive relative to equity and debt benchmarks.
Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.
Disclosure: I am long JNJ.