It’s important to have the right stocks in your portfolio at the right time. It’s equally important to take a pass on certain stocks as well.
The obvious reason is to avoid owning a stock with a high probability of losing value. But there’s more to it.
The “wrong” stock could seem like a perfectly fine stock. It could be one that pays a dividend and gives you a tidy capital gain at the end of the year. Those could also be the reasons you’re not collecting as much income as you could be.
That’s why I don’t recommend a lot of the popular dividend payers. I just don’t think you’re getting your money’s worth.
Johnson & Johnson (JNJ) is one of them.
On the surface, the company looks like a perfect bedrock holding. It’s a giant global company with its hands in medical devices, pharmaceuticals, and consumer health products. You probably have some of its signature brands in your medicine cabinet right now.
JNJ has earned both the dividend aristocrat and dividend king titles. That is no small feat and means it has increased its dividend for over 50 years and is included in the S&P 500.
Its products are recession-resistant and it has a proven track record. I still wouldn’t add it to our portfolio for one simple reason—I don’t think its 2.6% dividend yield is enough.
Use This Made-Up Word to Get Your Money’s Worth
Does a Starbucks coffee add $6.79 worth of joy to your morning? Could you get more joy from a cup of QuikStop gas station coffee? No judgement here, just a legit question.
Choices are what make the world go round.
Every time you buy a caramel latte, fast-food burger, or a new pair of shoes, you’re making a choice whether the product or service is worth what you’re paying.
My background is in economics, and we have a word for this—“util.”
A util is an invented measure to describe the amount of value or usefulness or satisfaction from an item. Most economic theory is based on the idea that consumers will strive to maximize its utility.
We all use this concept everyday whether or not we realize it.
And I think it should be applied to every stock before it joins a portfolio.
I consider the macro environment, the potential risk of holding the stock, and how much confidence I have in the company. Then I come up with a dividend yield I need in return for my money.
I know that “boring” consumer staples stocks tend to pay lower but safer dividends, but I still have a hard rule. I won’t settle for less than a 3% yield on any of my holdings. I actually aim for closer to 3.5%.
Again, utility is subjective. Everyone’s mileage will vary.
You might adjust your minimum acceptable yield higher or lower depending on your risk tolerance.
Getting back to JNJ, it finally plans to split into two companies this November. Although not surprising, the separation carries some risks. This added risk and uncertainty is why I’d expect to earn a higher dividend yield.
Every decision is made to the exclusion of all others. There could be higher utility opportunities out there.
According to Bankrate.com, 1-year CDs are currently paying between 4.15‒4.75% interest. Some have no minimum investment required.
Stack JNJ against a CD… and the CD is a no-brainer.
There’s no chance the face value of my CD is going to decrease on the whims of the market. The trade-off is that your money will be tied up for a whole year.
All of these factors go into the “util” calculation.
And right now, my conclusion is JNJ doesn’t pay enough to warrant your investment.
I didn’t always think this way about JNJ. In May 2012, I recommended it to my readers. At the time, shares were only $64.68 and the yield was 3.7%.
Today, there are much better opportunities.
For more income, now and in the future,
