Sunday, November 21, 2010

Dividend Machine Johnson and Johnson, JNJ

Over my many years of investing I have owned Johnson & Johnson, symbol JNJ, many times and always sold it at a gain. I have again added JNJ to my portfolio as a dividend machine and I want to share my thinking with you to help you learn how to pick dividend machines for your portfolio. JNJ is the second of fifty two dividend machines I will profile for your income investing portfolio.

First you have to convince yourself that you need dividend machines in your portfolio. If you depend on dividend income for your living expenses, then you need dividend machines. If you are investing for the future but consider your self a conservative investor willing to take some risk by investing in equities, you need dividend machines. If you have a ROTH IRA and want it to create tax free income, you need dividend machines.

Do you realize that if you reinvest a 4% annual dividend which means you use the dividend to buy more shares, then the dividend goes up by 3.5% every year, your dividend income will more than double in 10 years. When you retire, you will appreciate being able to turn on that income spigot.

An analysis of JNJ follows. Let's review the 4 criteria we use to select a dividend machine. (1) The company must make money and JNJ earns $4.87 per share per year; (2) the company needs to pay you a dividend of at least 3 % but less than it earns, JNJ pays out $2.16 per share per year which is a 3.38% yield based on the closing price of $63.83 on Friday; and the dividend is much less than the $4.87 it earns; (3) the company needs to have increased the dividend every year for at least 5 years and JNJ increases its dividend about 2.6% per year; (4) finally, the company has to have a solid balance sheet, JNJ is a solid company and when measured by debt to equity ratio it is very strong with its D/E ratio a low .21.

Another reason I like JNJ is because of a recent development regarding a drug they are working on. I use a bio technology analyst to help me evaluate developments in the pharmaceutical and medical arena. I respect his analysis very much. He has made me a lot of money over time. He tells me the new blood thinner drug JNJ is working on to replace something called warfarin will be a block buster. Apparently the technology is truly revolutionary, but also the market for it is very large.

Therefore, it is time to add JNJ to my dividend machines.

I hope you had a chance to learn from this analysis so that you can add dividend machines to your portfolio.

Very Truly Yours,


This week we will explore municipal bonds. After a rally, the bonds may be a buy, let's see.