Higher Dividend King: Johnson & Johnson vs. Abbott Laboratories

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Dividend Kings are shares which have elevated their payouts for 50 years or longer. They’re among the many finest and most secure revenue shares to carry in your portfolio. Though they do not at all times present buyers with the best yields, you are more likely to see your dividend revenue rise from holding a majority of these investments over time.

That is why you should not scoff at dividend progress shares with low yields as a result of these payouts will be deceptively low. A few Dividend Kings you will not have to fret about paying low payouts at present are Johnson & Johnson (JNJ -0.07%) and Abbott Laboratories (ABT 1.04%). Each pay greater than the S&P 500 common of 1.4%, however which one is the higher dividend inventory to carry?

An advisor explaining a financial chart to a client.

Picture supply: Getty Pictures.

Johnson & Johnson has sometimes paid the next yield

Should you have been to purchase based mostly on yield alone, you is likely to be tempted to go together with Johnson & Johnson because the healthcare large has for the previous 5 years usually offered buyers with the upper payout:

JNJ Dividend Yield Chart
Knowledge by YCharts.

However when you’re a long-term investor, you understand that the yield solely tells a part of the story and that it is also essential to think about how beneficiant these corporations usually are with respect to creating fee hikes.

Abbott’s excessive fee of dividend progress comes with an asterisk

Regardless of paying a decrease yield, Abbott has been the extra beneficiant firm with respect to dividend hikes in recent times:

JNJ Dividend Chart
Knowledge by YCharts.

Over a five-year interval, Johnson & Johnson’s dividend has elevated by a median of 6.1% per 12 months. Abbott’s will increase common a a lot increased fee of 12.1%.  Ought to that dividend-hiking sample proceed and the share costs of those two shares do not change, it might take seven extra will increase for Abbott’s dividend to surpass Johnson & Johnson’s.

However that is based mostly on quite a lot of assumptions. The apparent problem in predicting future dividends is that the speed of improve can fluctuate enormously. In 2022, for instance, Abbott raised its dividend by 4.4%, and a 12 months earlier, it hiked it by 25%. In the meantime, Johnson & Johnson just lately raised its dividend by 6.6% — the next fee than Abbott’s most up-to-date improve.

What could also be a greater predictor of future hikes is the free money circulation every enterprise generates.

Free money circulation versus dividends paid

Though there are usually fluctuations within the timing of when money is available in and flows out, Johnson & Johnson’s free money normally has been a lot increased than the dividends it has paid out each quarter. 

Fundamental Chart Chart
Knowledge by YCharts.

In Abbott’s case, the fluctuations have sometimes fallen into the crimson, with free money circulation not being sturdy sufficient to cowl dividend funds by itself. And the sturdy 12 months that the corporate had in 2020 throughout the pandemic explains why there was such a beneficiant dividend hike of 25% the next 12 months: Free money was a lot increased than regular.

Fundamental Chart Chart
Knowledge by YCharts.

Except there is a sudden surge in demand for COVID-19 testing, it is not going that Abbott goes to repeat the sturdy efficiency it had in 2020 anytime quickly. And which means big fee hikes will probably be much less possible within the close to future.

Dividend buyers are higher off going with Johnson & Johnson

The one space the place Abbott seems to be to be the higher dividend inventory is in its dividend progress fee, however that comes with an asterisk as the corporate made a big improve to the payout one 12 months that inflated that share. So it isn’t reflective of a sample that appears sustainable over the long run, and that is why the safer revenue inventory is Johnson & Johnson, because it’s more likely to generate extra dividend revenue on your portfolio over the long run than Abbott.

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