Some investors might hesitate to buy high-yield stocks, fearing that their dividend will be cut upon the next unforeseen headwind. However, high-yield Dividend Kings are ideal candidates for the portfolios of income investors. They have raised their dividends for at least 50 consecutive years and have proved resilient even under the most adverse business conditions.
They also offer above-average dividend yields, which are important in the current investing environment, given the 40-year high inflation rate. In this article, we will discuss the prospects of 3 of the highest-yield Dividend Kings: PepsiCo (PEP), AbbVie (ABBV), and Johnson & Johnson (JNJ).
PepsiCo is a global food and beverage giant, which generates $82 billion in annual sales. Its product portfolio includes Pepsi, Mountain Dew, Frito-Lay chips, Gatorade, Tropicana orange juice and Quaker foods. The company has more than 20 brands with annual revenues in excess of $1 billion.
PepsiCo is facing some secular headwinds in its flagship business. Consumers have become more health-conscious in recent years. As a result, the consumption per capita of carbonated drinks has decreased to a nearly 30-year low level.
On the other hand, PepsiCo has done its best to reduce its dependence on its flagship products. The Pepsi-Cola trademark currently generates only about 10% of the total sales of the company. Moreover, in a similar fashion to the tobacco giants, PepsiCo takes advantage of the inelastic demand for its products and raises its prices faster than the rate of the consumption decline.
PepsiCo has recovered strongly from the pandemic. In the fourth quarter of 2021, the company grew its revenue 12% over the prior year’s quarter, to $25.3 billion, exceeding the analysts’ estimates by a whole $1 billion. Beverages and food & snack grew its volumes 7% and 4%, respectively. PepsiCo Beverages North America posted 12% revenue growth while Frito-Lay North America grew its revenue 13%.
Thanks to its strong business performance, PepsiCo grew its adjusted earnings per share by 4% in the fourth quarter and by 13% in the full year, from $5.52 in 2020 to a new all-time high of $6.26 in 2021. Thanks to its sustained business momentum, PepsiCo expects to grow its organic sales by 6% this year and its adjusted earnings per share by 6.5%, to a new all-time high of $6.67.
PepsiCo enjoys some major competitive advantages, namely the strength of its brands and its immense scale, which results in strong pricing power with its vendors. Thanks to these advantages, PepsiCo has raised its dividend for 50 consecutive years.
Moreover, the stock is currently offering a 2.6% dividend yield. Given its healthy payout ratio of 69%, its decent growth prospects and its solid balance sheet, PepsiCo will continue raising its dividend for many more years. On the other hand, it is important to note that the stock is currently offering a nearly 10-year low dividend yield of 2.6%. Therefore, income-oriented investors should probably wait for a correction of the stock.
AbbVie is a biotechnology company focused on developing and commercializing drugs for immunology, oncology and virology. It was spun off by Abbott Laboratories in 2013.
AbbVie has a short history as a standalone company but it has exhibited strong business performance, with remarkable consistency. Since its spin-off, AbbVie has grown its earnings per share every single year, at a 19% average annual rate. In addition, thanks to the essential nature of its products, the pharmaceutical giant has proved resilient throughout the coronavirus crisis. It grew its earnings per share by 18% in 2020 and by another 20% in 2021.
AbbVie has provided rosy guidance for this year, as it expects to achieve earnings per share of $14.00-$14.20. At the mid-point, this guidance implies 11% growth over the prior year.
The only caveat for this high-quality biotechnology giant is the upcoming patent expiration of its most important drug, Humira, in the U.S. in 2023. Humira, which is used in the treatment of rheumatoid arthritis, generated 31% of AbbVie’s total revenue in 2021. It is reasonable to be concerned over the expiration of the patent of Humira in the U.S. next year.
However, AbbVie has made great efforts to ensure for a smooth transition after the expiration of the patent of Humira in the U.S. The company has developed two other auto-immune drugs, Rinvoq and Skyrizi, which are likely to offset a significant portion of the expected losses in the sales of Humira after the expiration of its patent. As a result, it has reduced its dependence on Humira, which comprised 43% of total revenues in 2020 but only 31% of total revenues in 2021. This helps explain why management has stated that the total revenues in 2025 will be higher than those in 2020.
AbbVie is currently offering a 3.4% dividend yield, with a remarkably low payout ratio of 40%. The company has raised its dividend every single year since its formation as a standalone company and has grown it at a 17% average annual rate over the last five years. Given its low payout ratio, its healthy balance sheet and its resilience to recessions, AbbVie is likely to continue raising its dividend meaningfully for many more years.
Johnson & Johnson
Johnson & Johnson is a diversified health care company and a global leader in pharmaceuticals (~49% of sales), medical devices (~34% of sales) and consumer products (~17% of sales).
Johnson & Johnson has 28 brands/pharmaceutical platforms that generate annual revenues in excess of $1 billion. The company is a leader in its markets, as it generates approximately 70% of its sales from the Nr 1 or Nr 2 market share position.
It is also the fifth-largest company in the U.S. and the eighth-largest company in the world in the total amount spent on Research & Development (R&D). Thanks to the unparalleled performance of its R&D division, the pharmaceutical giant has achieved an impressive growth record. It grew its operational earnings for 36 consecutive years until 2020, when the pandemic caused a 7% decrease in its earnings per share.
Even better, Johnson & Johnson has emerged stronger from the pandemic. In 2021, the company grew its earnings per share 22%, to a new all-time high. In addition, thanks to its sustained business momentum, management expects to grow the bottom line by another 7% this year. As Johnson & Johnson has exceeded the analysts’ earnings-per-share estimates for 20 consecutive quarters, it is likely to exceed its own guidance.
Moreover, Johnson & Johnson has proved one of the most resilient companies to recessions in the investing universe. Thanks to its resilience and its admirable earnings growth trajectory, the company has raised its dividend for 59 consecutive years.
The stock is currently offering a 2.4% dividend yield. Given its healthy payout ratio of 40% and its rock-solid balance sheet, Johnson & Johnson is likely to keep raising its dividend for many more years. The next dividend hike is expected to be announced in about three weeks.
Dividend Kings are ideal candidates for the portfolios of risk-averse investors. These stocks have raised their dividends for at least 50 consecutive years thanks to the exceptional competitive advantages they enjoy and their resilience to recessions. The above 3 Dividend Kings are offering above-average dividend yields, with a wide margin of safety.
(Disclosure: The author is long PEP, ABBV.)
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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