Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Johnson & Johnson Dividends Survive a Steepening Yield Curve
Transcript
- Lucas: So the ten-year Treasury yield just hit four point six three percent, and the two-year is at four point two six. That spread has widened again this week, and if you're a dividend investor, that raises a pretty direct question: why own stocks that yield three percent when you can get four and a half on a government bond? Luna: Right, and we've seen some dividend names sell off this week. Coca-Cola dropped over three percent. Procter & Gamble down one and a half. But then you've got Johnson & Johnson up two point three percent. That's a pretty big divergence. Lucas: Exactly, and that's the episode right there. JNJ is sending a signal that the market still believes in its payout, even as bonds get more attractive. So I want to dig into why Johnson & Johnson's dividend holds up in a steepening curve, and what that tells us about dividend safety more broadly. Luna: Let's start with the balance sheet. JNJ generated about seventeen billion dollars in operating cash flow last year. Their dividend cost them roughly eleven billion. That's a payout ratio on cash flow of about sixty-five percent, which is solid. Lucas: And if you look at it on an earnings basis, it's even lower. Trailing earnings per share around ten dollars, dividend per share around four seventy. That's a forty-seven percent payout ratio. That gives them a ton of room to keep raising the dividend even if earnings dip. Compare that to something like Altria, which pays out over eighty percent of earnings. Luna: Altria's yield is above eight percent right now, but the market is pricing in risk. Their stock dropped one point two percent this week, even as yields rose. The high yield is actually a warning sign if the payout isn't sustainable. Lucas: Right, and that's the classic trap. A steepening yield curve usually means the market expects stronger economic growth, but also potentially higher inflation. For a company like Altria, which is already dealing with declining cigarette volumes, that combination is tough. Johnson & Johnson, on the other hand, sells healthcare products that people buy regardless of the economy. Luna: And they have a triple-A credit rating. That's rare. Only two other U.S. companies have it: Microsoft and ExxonMobil. That means JNJ can borrow at very low rates, so they're not forced to cut the dividend even if cash flow dips temporarily. Lucas: That credit rating is a huge moat. If JNJ ever needed to raise cash, they could issue ten-year debt at maybe four point eight percent right now. Their dividend yield is about three point one percent. So they're actually generating a spread by borrowing cheap and paying out dividends that grow over time. That's a luxury most dividend payers don't have. Luna: And let's be honest, if our money conversations have helped you think about a decision differently — whether it's picking a dividend stock or just understanding yield curves — we'd love for you to consider supporting the show. Lucas: Yeah, we keep this podcast ad-free by design. No sponsors, no interruptions. If you find value in that, the simplest way to back us is buy me a coffee dot com slash fexingo. It's a small gesture, but it keeps the lights on and lets us keep digging into these topics. Luna: Exactly. And we're grateful to everyone who's already done that. Now, back to JNJ — I want to talk about the pharma pipeline, because that's really what drives future dividend growth. Lucas: Good point. JNJ's pharmaceutical division accounts for about fifty-five percent of operating profit. They've got key drugs like Stelara, which is a big revenue driver, but it faces biosimilar competition starting next year. That's a known risk. Luna: But they've also got Darzalex for multiple myeloma, which is still growing, and a pipeline in immunology and oncology. The question is whether those new drugs can offset the Stelara patent cliff. Lucas: And that's where the credit rating and the balance sheet come back in. Even if pharma revenue dips for a couple of years, JNJ's medtech and consumer health segments provide a base. Their medtech business grew about five percent last year, and consumer health is steady. So the dividend isn't riding on one drug succeeding. Luna: Compare that to a company like AbbVie a few years ago, when Humira went off patent. They had to cut costs and lean on new drugs to maintain the dividend. JNJ is more diversified. Lucas: Diversification within the business is a key part of dividend safety that people overlook. They look at the payout ratio and the yield, but they don't ask: how many revenue streams support this dividend? JNJ has three major segments, each with dozens of products. That's a lot of shock absorbers. Luna: And in a steepening yield curve environment, that stability becomes more valuable. Bond yields are competing for your income dollar, but bonds don't grow their payments. JNJ has raised its dividend for sixty-two consecutive years. Lucas: Sixty-two years. That's a Dividend King. And the five-year dividend growth rate is about six percent. So if you buy JNJ at a three percent yield, and they grow the dividend at six percent annually, your yield on cost in ten years is over five percent. That's the real argument against bonds right now. Luna: But you do have to be patient. In the short term, if bond yields keep rising, JNJ's stock price could dip as income investors rotate. We saw that in 2022. Lucas: Absolutely. And that's the trade-off. JNJ's total return might lag in a rapid rate-hike environment. But the dividend itself is safe. And if you're a long-term income investor, the price volatility is actually an opportunity to buy more shares at a lower cost basis. Luna: So what's the one thing you want listeners to take away from this episode? Lucas: When the yield curve steepens and bond yields jump, don't automatically flee dividend stocks for bonds. Instead, look at the quality of the dividend. Check the payout ratio, the credit rating, and the diversity of the business. A stock like JNJ may yield less than a bond today, but it offers something bonds don't: a growing income stream that's built to last through multiple economic cycles. Luna: And if you want to see how other dividend stocks stack up on those metrics, we'll have a follow-up episode next week looking at the healthcare sector more broadly. Lucas: Sounds good. For Dividend Investing with Fexingo, I'm Lucas. Luna: And I'm Luna. Thanks for listening.