Quick question…
Would you rather own a 10-year Treasury note that yields 4%… or shares in a company that yield 2.75%?
If you’re like most folks, you’d probably pick the bond because you think it will give you more income.
But that would be a mistake.
Because that 2.75%-yielding company is healthcare giant Johnson & Johnson (JNJ).
And while JNJ has a lower starting yield… It’s likely to produce more income than a 4%-yielding bond over the next 10 years.
Today, I’ll show you why…
Better Results Than a Bond
Over the past decade, JNJ has grown its dividend by an average of 6.4% each year.
In fact, the company has raised its dividend 61 years in a row.
Our research at Wide Moat shows that companies with long histories of reliable dividend growth are one of the safest income investments on the market.
JNJ is one of only two companies that has a “AAA” credit rating. That’s even higher than the credit rating for U.S. government.
Over the past 10 years, JNJ has increased its earnings per share (EPS) by an average of 7% each year.
Companies use earnings to invest in growing their business… and to reward shareholders with dividends. So a constantly growing EPS means the company is doing well and has more money to pay dividends every year.
And as I showed you two weeks ago, it will benefit from rising demand as our country grows older.
So it’s reasonable to assume the company will continue growing its earnings and its dividend at a 6.4% rate for the next decade.
Here’s what your income would look like if you put a $10,000 investment into a bond vs. JNJ…
A $10,000 investment in 4%-yielding bonds would give you $400 each year in interest.
That’s not bad… And it’s certainly higher than the $275 in annual dividends you would start off with using the same $10,000 investment in JNJ.
But by year 10, your JNJ stake would be producing $481 in dividends each year.
Over 10 years, you’d collect $4,000 in interest from the bond investment. Meanwhile, the JNJ investment would give you $3,694 in dividends.
Seems like the bond wins, right?
But that’s the return before you pay your taxes.
The government taxes bond interest at ordinary income rates. But dividend income is taxed at a special lower rate.
For many people, taxes on dividends are just 15% compared with the 22-24% they pay on regular income.
Even better, folks earning less than $44,725 ($89,450 if married) don’t have to pay taxes on dividends at all. There’s a good chance you qualify if you’re retired.
Let’s compare the after-tax income from the investments we looked at earlier:
For this example, we’re considering a person in the 22% tax bracket.
A $10,000 investment in 4%-yielding bonds would give you $312 each year after taxes.
A $10,000 investment in JNJ would start off with just $224 each year after taxes. But by year 10, it would be producing $409 after taxes.
Over 10 years, you would collect $3,120 after tax from the bond investment. Meanwhile, JNJ investment would give you $3,140 after tax.
So when you look at the full picture, a dividend growth powerhouse like JNJ delivers more income over the same period than a 10-year Treasury.
And that’s not the end of the story.
After 10 years, you’d get your $10,000 back from the bond investment.
But if JNJ continues growing its earnings at the same pace as its dividend, it would be earning nearly 75% more 10 years from now.
If the market values it at the same 16x earnings that it trades for today, your $10,000 investment would be worth $17,500.
So investing in JNJ can earn you three times as much as the bond… while still providing the same amount of reliable income.
Where to Find the Outperformers
The message is clear….
A dividend stock may start off with a lower yield than a bond. But its dividend growth and special tax advantage can make it a better income investment in the long run.
That’s why I recommend you start investing in companies with growing dividends right now.
The more time your investments have to compound and grow, the fatter your income stream will be over time.
Johnson & Johnson is a great place to get started. It’s one of my favorite safe income plays. Since recommending it in 2020, we’re up 56% on the stock. And it’s still trading below our buy-up-to price…
And that’s just one of the names in our model portfolio at Intelligent Income Investor.
Some other recommendations offer higher dividend yields in the 4-5% range… or are trading at big discounts to our estimated fair values.
These blue-chip companies are the best sleep well at night (SWAN) investments I know of in the market. And you can add them to your portfolio and earn better-than-bond income starting today.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily