Personal Finance

Here's the Best Dividend Stock in Big Pharma

JNJ Dividend Chart

When looking for the best pharma dividend stocks , there are a few metrics investors should look for:

  • High dividend yield
  • Reasonable dividend payout ratio
  • History of dividend increases
  • High likelihood of increase in share price

All four categories are critical, but unfortunately, you're unlikely to find a company that tops the charts in all of them.

A company with an extraordinarily high dividend yield, for instance, likely pays that well because investors aren't clear whether the drugmaker can sustain its dividend and/or increase its share price.

JNJ Dividend Chart

JNJ Dividend data by YCharts .

Still need growth

With the first three bullet points above checked off, the only question is whether Johnson & Johnson has the potential to grow its share price.

A 2.9% yield is a good return compared to a bank account, but bank accounts have little risk associated with them. To justify the added risk of holding shares that can go down, investors need to expect a dividend and capital appreciation in the long term.

At the moment, Johnson & Johnson is trading at a reasonable 19.6 P/E, about in the middle of where it's traded over the last five years. While not super cheap, there's rarely a bad time to buy Johnson & Johnson.

As a conglomerate, Johnson & Johnson has the ability to grow earnings faster than revenue by increasing its margins -- especially through acquisitions, where synergies can help cut costs.

JNJ Revenue (TTM) data by YCharts .

The company also isn't afraid to sell off businesses when they're not helping its bottom line growth. For example, Johnson & Johnson sold its Cordis interventional vascular technology business to Cardinal Health last year, freeing up approximately $2 billion to deploy where Johnson & Johnson thinks it can get a better return on investment.

As long as management continues to stay on course, investors should see solid growth in share price in addition to the dividend, making Johnson & Johnson the best dividend stock in big pharma.

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Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Johnson and Johnson. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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