Johnson & Johnson – JNJ ‘AAA’ Dividend Safety

If we look at investment opportunities beyond the Pharmaceutical and Healthcare Equipment sectors, we find high-quality companies that can generate far superior returns to those of JNJ and with almost equally high dividend safety.

By way of example, compare JNJ’s overall return relative to Visa (V) and Mastercard (MA) – my largest and second-largest holdings; the following reflect the performance of V and MA relative to JNJ from the date both V and MA went public.

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While V’s and MA’s future returns may not be the same as historical levels, I strongly suspect their future total returns will exceed that of JNJ. In fact, I recently disclosed the purchase of additional V and MA shares.

These are merely two examples of why investors should not focus primarily (solely…as many investors do) on dividends. Sometimes companies with razor-thin dividend yields generate superior long-term investor returns because the business generates an attractive return on investment; V’s and MA’s dividend yields are currently under 0.6%.

As much as there is a cachet to having a AAA rating, V and MA are rated highly by Moody’s and S&P Global.

V’s current ratings and outlook are:

  • Moody’s – Aa3 (stable)
  • S&P Global – AA- (stable)

MA’s current ratings and outlook are:

  • Moody’s – A1 (stable)
  • S&P Global – A+ (stable)

All ratings are investment-grade with V’s ratings being the lowest tier of the high-grade category. MA’s ratings are one notch lower and are the top tier of the upper-medium grade category.

The ratings define V as having a VERY STRONG capacity to meet its financial commitments and differ from the highest-rated obligors only to a small degree.

MA’s ratings define it as having a STRONG capacity to meet its financial commitments. MA, however, is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

V’s ratings are 3 notches below those of JNJ and MA’s ratings are 4 notches below those of JNJ. Their credit ratings, however, should be acceptable for most risk-averse investors.

Only you can determine whether V’s and MA’s potential to generate superior long-term investor returns relative to JNJ warrants the extra risk.

In What Type of Account Should JNJ Shares Be Held

If you decide JNJ is a suitable investment, consider the type of account in which you hold your shares; I suspect many investors give little consideration to this matter.

I do not know your personal circumstances and am not offering investment advice. Furthermore, I am unfamiliar with investment accounts outside of Canada and their tax implications. I merely share my personal situation to demonstrate why the type of account used is worthy of consideration.

When I initiated a JNJ position in 2001, I acquired shares in a Registered Retirement Savings Plan (RRSP). My rationale for acquiring JNJ shares through a ‘tax efficient’ account as opposed to a taxable account is that I benefited from a tax deduction. In addition, none of the dividend income derived from my JNJ shares would incur any tax until I withdrew funds from the RRSP.

Years later, I initiated JNJ positions in taxable accounts; I reflect these JNJ positions in my monthly FFJ Portfolio reports. I initiated these positions because after retiring I no longer generated employment income. Since I could no longer make RRSP contributions, I had to acquire shares in taxable accounts if I wanted to increase my JNJ exposure.

Unlike the JNJ shares held in my RRSP, the quarterly dividends from the holdings in the taxable accounts trigger a 15% dividend withholding tax immediately upon distribution. I receive ~$0.90/share and not $1.06/share. As noted earlier, JNJ’s dividend yield for the shares held in taxable accounts is currently ~2%.

The term ‘tax-efficient’ when referring to a RRSP is a misnomer. Contributions to a RRSP are tax-deductible and the value of the investments grow tax-free until they are withdrawn. There is, however, an automatic withholding tax on the value of the withdrawal (tiered structure). The RRSP withdrawal must also be taken into income in the year of withdrawal.

Even if you never make any RRSP withdrawals, the government still ‘extracts its pound of flesh’ at some point. RRSPs must be converted to a Registered Retirement Income Fund (RRIF) no later than the year in which the account holder turns 71 years of age. Once a RRIF is established, there is a formula that stipulates the minimum annual withdrawals.

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Disclosure: I am long JNJ, MSFT, V, and MA.

Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual ...

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