Johnson & Johnson's Healthy 3.3%-Yielding Dividend Is a Very Safe Way to Make Passive Income

Key Points

• Johnson & Johnson continues to generate plenty of free cash flow to cover its dividend.

• The healthcare giant also maintains an elite balance sheet.

• With more growth ahead, it should have no trouble continuing to increase its high-yielding payout.

• 10 stocks we like better than Johnson & Johnson ›

Johnson & Johnson (NYSE: JNJ) has been an extremely reliable dividend stock for decades. The healthcare behemoth has raised its payment for 63 straight years, including by 4.8% earlier this year. That places it in the elite group of Dividend Kings -- companies with 50 or more consecutive years of increasing their dividend payouts.

The healthcare company's payout currently yields 3.3%, more than double the S&P 500's (SNPINDEX: ^GSPC) dividend yield (near a record low at around 1.2%). That high-yielding payout is very healthy, making Johnson & Johnson a very safe way to collect dividend income.

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A financial fortress

Johnson & Johnson recently reported its second-quarter financial results, which once again showcased the safety of its dividend payment. The healthcare company reported that it generated approximately $6.2 billion in free cash flow through the first half of this year, following investments of $6.7 billion in research and development (R&D). That was enough cash to cover its dividend payment, which has cost $6.1 billion year to date.

While that might seem like a tight payout ratio, investors need not be concerned. Its free cash flow is only down slightly compared to the year-ago period, when it produced $7.5 billion through the first half of the year. Johnson & Johnson generated $20 billion in total free cash flow last year, easily covering its $11.8 billion dividend outlay.

Meanwhile, Johnson & Johnson has one of the best balance sheets in the world. The company has a pristine AAA bond rating (one of only two companies in the world with elite credit). It ended the first quarter with $19 billion of cash and marketable securities on its balance sheet (nearly two years of dividend payments) against only $51 billion of debt. The $32 billion in net debt is a relatively small amount for a company with a roughly $375 billion market capitalization.

Johnson & Johnson has maintained a strong balance sheet, even as it has deployed $15 billion in strategic inorganic growth opportunities over the past year, and more than $30 billion over the last two years.

Investing heavily to grow

Johnson & Johnson's robust financial profile enables it to invest heavily in R&D and M&A, driving growth of its innovative medicine and MedTech platforms. Last year, the company spent more than $17 billion in R&D (19.4% of its total sales). That made it one of the top R&D investors across all industries. Adding acquisitions and other inorganic investments, the company invested a whopping $50 billion in growth initiatives last year.

Those growth investments are starting to pay off. "Our portfolio and pipeline position us for elevated growth in the second half of the year," commented CEO Joaquin Duato in the second-quarter earnings press release. As a result, the company boosted its annual revenue guidance by $2 billion (implying 5.4% growth for the full year) and tacked $0.25 per share to its adjusted earnings per share outlook, increasing the midpoint to $10.68.

The company anticipates it will continue growing at a healthy pace over the next few years. By 2027, Johnson & Johnson expects that one-third of its MedTech sales will come from new products.

Meanwhile, the company expects to launch more than 10 innovative medicine assets by 2030, with the potential to deliver over $5 billion in peak-year sales. The growth from these products will help to more than replace the lost sales from expiring patents, enabling the company to continue increasing revenue and free cash flow at healthy rates. It can also continue utilizing its fortress balance sheet to supplement its R&D efforts with strategic M&A opportunities as they arise.

A very safe dividend stock

Johnson & Johnson continues to showcase its elite ability to pay dividends. The healthcare company's high-yielding payout remains on rock-solid ground, even though its free cash flow is down through the first half of this year. With a fortress balance sheet and visible growth ahead, the company should have no problem continuing to increase its dividend at a healthy pace. As a result, it remains an extremely safe way to generate passive dividend income.

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Matt DiLallo has positions in Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.