Should You Forget Johnson & Johnson and Buy This Magnificent High-Yield Stock Instead?

Several years ago I bought shares of 3M (NYSE: MMM) even though it was in the middle of a major class-action lawsuit. I believed the industrial giant would survive the legal issues, which it has. But I was surprised at how difficult it was for me to stick it out, given the lack of information from the company on the legal front.

I think Johnson & Johnson (NYSE: JNJ) is a great company, but I see visions of 3M when I look at it -- which is why I opted for the high-yield stock of a competitor. Here's why you also might want to skip J&J and buy Medtronic (NYSE: MDT) instead.

What does Johnson & Johnson do?

After spinning off its consumer-products operations, Johnson & Johnson was left with two main business lines: pharmaceuticals and medical devices. Healthcare is incredibly complex, and I don't pretend to understand everything that the company does, but it is an industry leader in both areas. And it has a proven track record of success in a somewhat tangential area.

Johnson & Johnson is a Dividend King. It has increased its dividend annually for 63 consecutive years. You don't build a record like that without having a strong business model that gets executed well in good times and bad. This is the concrete proof I look at when I consider the strength of the company's healthcare business, and I believe J&J will continue to be an industry leader for years to come.

There's just one problem, and it's the one that led me to sell out of 3M. Like 3M, Johnson & Johnson is embroiled in a massive class-action lawsuit. With J&J, the suit is about contaminated talcum powder it sold, which was linked to increased cancer cases among its users. J&J can't really talk openly about the legal issues, which makes the problem something of a black box. But it's a potentially huge black box that will ultimately be addressed by a jury (or juries, since there are multiple cases underway).

There's no way to know how that will play out, or even to keep close tabs on the issue. So I won't buy Johnson & Johnson, because it would basically be repeating the mistake I made with 3M. I don't have the fortitude to own stock in a company facing a major problem that it can't talk about.

Image source: Getty Images.

Medtronic is a better alternative

Medtronic is one of the largest medical device makers in the world. It competes head-to-head with J&J in that area, which makes them fairly similar in my eyes. While Medtronic is not (yet) a Dividend King, it has increased its dividend for 48 consecutive years. I believe getting to 48 years takes just as strong a business as getting to 63 years, allowing Medtronic to stand toe to toe with Johnson & Johnson.

The two companies have similar dividend yields as well, with both sitting at roughly 3.3%. Meanwhile, those yields are both near the high end of each company's historical yield range, which hints that each stock is attractively priced for dividend lovers like me.

Data by YCharts.

That said, Medtronic isn't facing the kind of high-profile class-action lawsuit that has helped to put Johnson & Johnson on the sale rack. Medtronic's problem is that growth over the last few years has been sluggish. But it has new products coming out now, and it's revamping its business to focus on more profitable product lines.

The big move over the next year or so will be the spinoff of Medtronic's diabetes division. The move is expected to be accretive from day one, so the shift back to higher profitability could be coming sooner than Wall Street thinks.

The downside is where things get interesting

With Johnson & Johnson, I would get a healthcare giant with an industry-leading business. I am confident it will continue to lead the industry for years to come, and it's currently paying shareholders an attractive 3.3% yield. However, the downside risk and uncertainty are accentuated because of the talcum-powder lawsuits. I know from experience that I can't handle that emotionally.

With Medtronic, I get a healthcare giant with an industry-leading business. I'm confident it will continue to be a leader for years to come, and it's providing me with an attractive yield of 3.3% or so.

The downside risk for Medtronic is vastly different, since it amounts to the growth-driven revamp taking more time to play out than I expect. I have no problem sticking around for the long term if the company can continue its dividend payouts and keep me informed of its progress -- which it can and does. It's an easy choice for me: Medtronic wins.

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Reuben Gregg Brewer has positions in Medtronic. The Motley Fool has positions in and recommends 3M. The Motley Fool recommends Johnson & Johnson and Medtronic and recommends the following options: long January 2026 $75 calls on Medtronic and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.