Johnson & Johnson Or Pfizer For Dividends?

Includes: JNJ, PFE
by: Doug Carey

Solid dividend payers can form the backbone of a retirement portfolio.

Good dividend yields are harder to find these days.

We must also take into account dividend growth over time.

As the market continues to roar higher, the search for strong dividend yields for retirement portfolios becomes much tougher. But do we really need a 3% or higher dividend yield to set ourselves up for retirement?

When we analyze the projected future dividend payouts of a company, we need to look at their current dividend yield and their projected dividend growth. But how do we actually do this?

Let's take a look at two pharmaceutical companies. One, Johnson & Johnson (JNJ), has a dividend yield of only 2.3%. But its ten-year dividend growth rate is relatively strong at 7.4%. The other company I want to look at is Pfizer (PFE). Its dividend yield looks better at 3.6%. But its ten-year dividend growth rate is only 1%.


Div. Yield

Growth Rate

Payout Ratio





Div. Yield

Growth Rate

Payout Ratio




So how do we analyze the potential of these two companies? One has a higher dividend yield, but the other has a better ten-year dividend growth rate. Let's start by looking at the Yield On Cost (YOC).

The YOC measures the annual dividend divided by the original investment in the company's stock.

Dividend Yield Vs. Dividend Growth

I set the dividend yields to their current values. I also set their projected dividend growth rates to the values you see in the table above. I ran a projected dividend analysis in our free calculator called Dividend Yield And Growth.

It takes only seven years for the YOC for Johnson & Johnson to break even with the YOC for Pfizer. Of course, because of the compounding effect, we see the YOC for Johnson & Johnson explode upward over time. But this assumes that it can continue its relatively high dividend growth rate into the future.

So what about the projected return over time?

Although the yield on cost breaks even after seven years, it takes a bit longer for the compounded total returns to break even. In fact, it takes 16 years for the returns to break even. Also please note: I do not consider any price appreciation or price depreciation in these calculations, which means that compounded returns are due solely to dividends.

What this analysis shows is that it is vitally important to come up with a project of future dividend growth when comparing two dividend paying stocks. Does one really believe that Johnson & Johnson will continue its ten-year dividend growth? Will Pfizer really only increase its dividend by 1% over the next 20 years?

What Does The Future Hold?

Johnson & Johnson has a lower payout ratio than Pfizer (57% vs. 78%). This means that it is paying out 21% less of its earnings to dividends. This also means that it has more room to increase its dividends before it runs out of earnings to pay out.

Johnson & Johnson also saw net income grow by 7.3% last year while Pfizer's net income only grew by 3.7%. This also portends high-dividend growth for Johnson & Johnson compared to Pfizer.

Lastly, the debt to equity ratio for Johnson & Johnson is 48% while Pfizer's is 72%. Less debt payments mean more cash for dividend growth as well.

The combination of a lower payout ratio, better earnings, and lower debt leads me to want Johnson & Johnson in my retirement portfolio before I would buy Pfizer. Johnson & Johnson is poised to keep improving its dividends for a long time.

Analyzing Retirement Plans

We must project the future dividend growth, especially if one plans on holding dividend payers in his or her retirement portfolio for the long run.

I ran a retirement analysis in our Retirement Planner; I found that dividend payers who can return just 2% more than bonds or other dividend payers can significantly increase the chances of retiring without running out of money. The probability of never running out of money increases by 20% in this scenario. The key is finding companies who will not cut their dividends, and even better, will continue to increase their dividends over time.

Disclosure: I am/we are long JNJ.

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.