Johnson & Johnson – JNJ ‘AAA’ Dividend Safety

Depending on the value of the RRIF, the minimum mandatory annual RRIF withdrawals may place the taxpayer in the top income tax bracket.

Such is our case.

From a tax planning perspective, we will make annual RRSP withdrawals over the next decade before the RRSPs must be converted to RRIFs. This is commonly referred to as a ‘RRSP meltdown strategy’.

One of the drawbacks of holding shares in a RRSP is that capital gains, dividends, and interest are all taxed at the same level at the time of withdrawal. This is not the case when shares are held in a taxable account.

As noted earlier, V and MA are our first and second-largest holdings. The bulk of these shares are held in RRSPs so even though capital gains form the vast majority of the appreciation in the total value of these holdings, the sale of these shares and subsequent RRSP withdrawals will be taxed equally at our personal income tax level. Had these shares been held in taxable accounts, we would incur a 15% withholding tax on the quarterly dividends and have to declare the dividend income on our annual tax returns. The capital appreciation at the time of their eventual sale, however, would be taxed at a lower level than dividend income.

One reason an investor may want to hold JNJ shares in a taxable account is the opportunity to employ a conservative use of margin debt. In doing so, an investor can borrow against JNJ shares to acquire attractively valued shares in high-quality companies; the interest is tax-deductible. This is not possible when shares are held in RRSPs or RRIFs.

I am a strong proponent of employing a conservative degree of margin and really am not enamored with margin debt against highly volatile stocks. I view JNJ as the type of company against which you can borrow since its share price typically experiences low volatility.

JNJ – ‘AAA’ Dividend Safety – Final Thoughts

Investors seeking the safety and security of a stream of dividend income from a ‘AAA’ rated stock might want to consider investing in JNJ.

Relatively new investors might want to consider investing in JNJ for the long term as opposed to investing in companies of highly questionable value or because a company has an attractive dividend and dividend yield.

I say this because a permanent impairment to an investor’s capital can be a tough pill to swallow. When this happens in the early stages of an investor’s investment journey, some learn from their mistakes. Others, however, retreat and swear off investing for a very long time.

Investing is a tool to help an investor achieve their objectives and goals. The experience should be rewarding, educational, and pleasant.

An investment in JNJ for the long term might not lead to the maximization of potential investment returns. However, a JNJ investor is likely to experience long-term investment returns that outpace the rate of inflation without the drawback of nerve-wracking volatility.

What we witnessed in March/April 2020 was a sharp and swift pullback. Many investors today, however, have never experienced a prolonged ‘bear market’. ‘Bear markets’ are periods in which to go hunting for shares in attractively valued companies. It is, therefore, incredibly important not to become discouraged at the most inopportune time. It is for this reason that new investors might want to consider a relatively safe JNJ investment.

We are also witnessing ‘frothy’ market conditions; money has flooded into equities because of low returns achievable through other forms of investment. I do not think the current market conditions will last forever. When a market correction occurs, JNJ’s share price is unlikely to be hit to the same extent as the share price of companies whose valuations are totally detached from the underlying business fundamentals.

Having said this, I am not looking to add to my JNJ position.

JNJ was my 10th largest holding when I completed my April 12, 2021 FFJ Portfolio Holdings Review; it was my 7th largest holding when I completed a similar review in mid-August 2020.

The drop in ranking is not because I view anything wrong with JNJ but rather because I am purchasing shares in companies I think will generate long-term total investment returns that will exceed those of JNJ.

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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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