3 Important Dividend Stocks In My Stock Portfolio

I have a strong reason to keep dividend stocks, Johnson & Johnson (NYSE:JNJ), Brookfield Infrastructure Partners L.P. (TSX:BIP.UN, NYSE:BIP), and Toronto-Dominion Bank (TSX:TD, NYSE:TD), in my portfolio.

Johnson & Johnson logo

Johnson & Johnson

Allow me to be crystal clear. J&J will not deliver the highest returns as a stock in the healthcare space. I have other stocks for that. At the moment, that includes deep-value dividend stock, CVS Health (NYSE:CVS).

However, J&J’s financial performance is highly stable and predictable. Since 1999, the diversified healthcare conglomerate has increased earnings every single year on a per-share basis. Not surprisingly, it has increased its dividend every year in that period as well. 

Source: F.A.S.T. Graphs – J&J’s earnings and dividends persistently grow

Therefore, J&J stock serves as an excellent anchor for a diversified portfolio. Even when a recession hits, there’s no need to worry about its staying power. In fact, in the last two recessions, it thrived with double-digit earnings and dividend growth!

To sum it up, JNJ stock serves as a stabilizer and high-quality cash cow in my portfolio. I’ll continue adding to it at good valuations as a core holding of my diversified portfolio. 

Currently, I’d consider the stock to be fairly valued to modestly undervalued. At $135 per share, it trades at 15.7x earnings and is estimated to have earnings-per-share growth of 6% per year over the next three to five years. The stock also tends to command a premium multiple due to its high quality.

JNJ stock offers a safe yield of 2.8% backed by a payout ratio of 44%. It’s set to increase its dividend in late April.  

Brookfield Infrastructure

Brookfield Infrastructure is a top-notch globally diversified infrastructure company with utility, transport, energy, and data infrastructure.

Therefore, it has many directions of growing, such as seeking undervalued but quality assets in temporarily cash-constrained geographies in any of the infrastructure industries, making outright acquisitions of fitting businesses, and developing assets on its own. 

November 2019 map showing BIP's global infrastructure assets
Source: BIP Corporate Profile – November 2019 (pdf), Slide 5

BIP has obvious competitive advantages, which is evident by the fact that its total returns have excelled that of the utility industry and the market. On the NYSE, it generated annualized returns of 18% for the past 10 years!

Table showing BIP's total returns history up to October 2019.
Source: BIP fact sheet – October 2019 (pdf)

Because utility, energy transportation and storage, and data infrastructure assets are needed in all economies (good or bad), BIP’s cash flows are highly sustainable. About 95% of its cash flows are regulated or contracted and 75% are indexed to inflation, which offers organic growth without the need for any growth capital.

The only business that’ll experience a greater level of cyclicality is its Transport segment, which includes toll roads, rail, and ports, and generates a third of the company’s cash flows. 

The stock has had a super run, climbing 50% year to date! Admittedly, BIP stock was a great value at the beginning of the year, but now, it looks fully valued. As a result, I see it as a “hold” currently. 

BIP Chart

BIP data by YCharts

At US$52 per share, BIP offers a yield of 3.9%. However, it will be increasing its dividend soon in Q1. Management aims to increase the dividend by 5-9% per year. Assuming a hike of 7%, we’re looking at a forward yield of 4.2%, which is reasonable for a utility.

Toronto Dominion Bank

TD Bank has built a friendly franchise in North American retail banking. Recently, its total assets and total deposits reached CAD$1.4 trillion and CAD$870 million, respectively. Its Canadian and U.S. retail businesses contribute about 93% of its net income. 

Over two decades, TD stock increased the dividend by about 11% per year.

Bar graph showing TD's 20-year dividend growth history up to 2019
Source: Quick Facts Q3 2019 (pdf)

TD aims for medium-term earnings-per-share growth of 7-10% per year. At under CAD$77 per share, the quality dividend stock appears to be fairly valued to modestly undervalued, trading at about 12.1 times earnings, as near-term growth may be lower in the 5% range.

The stock offers a yield of more than 3.8% supported by a payout ratio of 43%. Furthermore, it will be increasing its dividend soon in late February. Assuming a hike of 7%, we’re looking at a forward yield of 4.1%, which is quite good for a quality business!

Source: Author – a TD bank in Brookfield Place in Toronto

Strategically trading in and out of more undervalued banks like Bank of Nova Scotia (TSX:BNS, NYSE:BNS) can lead to greater returns. However, TD stock will likely be more resilient.

Moreover, TD didn’t become the 6th largest North American bank by chance and is still expected to deliver greater growth than the other Big Five Canadian banks over the next 3-5 years. So, I plan to keep it in my long-term dividend portfolio.

Investor Takeaway

I’d categorize Johnson & Johnson, Brookfield Infrastructure, and Toronto-Dominion Bank as dividend stocks that are true passive income generators. In other words, I’d be comfortable enough to buy them at good valuations, lay back, and collect the dividends. 

I believe they are quality businesses that have above-average resilience to down markets, and that even during recessions, they’ll be able to maintain but more likely to increase their payouts. 

For other passive income generators, refer to our previous article on “How To Create A Passive Dividend Income Portfolio“.

If I had no stocks today, I’d consider buying some shares of J&J and TD Bank, which are trading at good valuations. They will start me off with a yield of 3.3%, assuming I invest the same amount of dollars in each. Here are five top stocks that may offer even better value, including four dividend stocks.

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Disclosure: As of writing, we’re long JNJ and on the TSX: BIP.UN, TD, and BNS.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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