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yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

If only all of my stocks produced returns like Johnson & Johnson.

Since I wrote a favourable column about J&J in October, 2012, shares of the world's biggest health-care products company have posted a total return of more than 46 per cent, including dividends. That compares with a return of about 41 per cent for the S&P 500 over the same period.

Thanks to the falling loonie, J&J's return in Canadian dollars has been an even more impressive 65 per cent. Regrettably, J&J isn't part of my Strategy Lab model dividend portfolio , only because the rules stipulate a 12-stock maximum. However, I own the shares personally and plan to hold them for many years to come. I would even consider adding to my position if the stock price weakens from current levels.

Here's why I remain a fan of the company:

Earnings are growing steadily

On Tuesday, J&J posted better-than-expected revenue and earnings for the third-quarter, prompting the company to raise its full-year outlook for the third time in 2014 – a very bullish sign.

Lifted by sales of prescription drugs – including Olysio for hepatitis C, Remicade for arthritis and Zytiga for prostate cancer – J&J's revenue rose 5 per cent to $18.5-billion (U.S.) and earnings soared 59 per cent to $4.75-billion or $1.66 a share. Excluding one-time items, per-share earnings came in at $1.50 – beating the average estimate of $1.45 according to analysts surveyed by Thomson Reuters.

And there's a lot more money to be made.

"We believe [J&J's] earnings growth will accelerate over the next few years, driven primarily by newly launched biopharmaceutical products and a decreasing impact from patent losses," Edward Jones analyst Ashtyn Evans said in a recent note.

The dividend keeps climbing

In April, J&J raised its dividend for the 51st consecutive year – one of the longest track records for a U.S. company (other members of the 50-year club include Procter & Gamble, 3M, Coca-Cola and Colgate-Palmolive). Given J&J's strong free cash flow and solid balance sheet – it's one of the few companies with a triple-A credit rating – the annual dividend hikes will almost certainly continue rolling in for many years to come.

J&J, which currently yields 2.8 per cent, has raised its dividend by roughly 7 per cent annually over the past five years, a pace that Ms. Evans expects will continue.

Consistent dividend growth, and a conservative payout ratio of less than 50 per cent of earnings, makes J&J a worthy candidate for investors seeking growth of income and potential for capital gains over the long term.

The company is diversified

J&J operates three separate business segments: pharmaceuticals, medical devices and over-the-counter consumer products. Such diversification is a plus because when one unit struggles, the others can pick up the slack. What's more, no product accounts for more than 10 per cent of total revenue. Even as J&J is well diversified within the health-care industry, the company as a whole stands to benefit from demographic trends: as consumers age, they tend to consume more pharmaceuticals and require more diagnostic tests. This bodes well for J&J in the long run.

The stock is reasonably valued

Despite J&J's solid results, the stock has dropped more than 10 per cent in the past three weeks, dragged down by the market's general malaise. The shares – which closed Tuesday at $97.01, down $2.11 – are now trading at a price-to-earnings multiple of about 15.3 times estimated 2015 earnings, down from more than 17 times as recently as September. For investors who believe in buying great companies when their shares are experiencing a setback, J&J is worth a look. That's not to say the stock won't fall further. It might. But it's already had a meaningful pullback.

The risks are acceptable

Governments and insurance companies are always looking for ways to rein in health-care costs, and "this pricing pressure is a continuous concern for investors and is a long-term risk for the industry," Ms. Evans said. Moreover, the company faces intense competition in the pharmaceutical space. For example, Olysio – introduced last year – was a big contributor to J&J's third-quarter earnings, but Gilead Sciences Inc.'s recently approved hepatitis C treatment Harvoni threatens to steal some of Olysio's market share.

However, given J&J's global reach, diversified product portfolio and long track record of growing revenue, earnings and dividends, the company will manage the risks and continue to prosper.

Globe app users click here for a chart showing Johnson & Johnson's dividend growth