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5 Best Dividend Stocks for Retirement Income

You don't just want yield. You want sustainability and dependability.

By Jeff Reeves, Executive Editor of

The best dividend stocks are deceptively simple to find.

retirement-pollAt its core, dividend investing involves a buy-and-hold strategy since dividend yields are calculated on an annualized basis. In other words, if you don’t hold for a least one year, you don’t get paid in full.

Also, the best dividend stocks are cash-rich and stable – not explosive growth companies that are plowing every penny into ambitious expansion or research. Remember, every penny a company spends on acquisitions or research is a penny it can’t give back to investors via dividends.

So rather than chase fad stocks or try to time the market, investors simply need to focus on three things to find the best dividend stocks for retirement:

  • Stability in any market environment
  • Plenty of profits and comfortable cash flows
  • A willingness to increase dividends over time

That’s it, really.

Investors chase a lot of stocks because they have big yields or sexy brands, but the bottom line is that these three elements need to be there for you to have confidence in your investments over the long term.

Let me show you what I mean. Here are the five best dividend stocks for retirement income that are case studies in stability, strong balance sheets and dividend growth.

Retirement Dividend Stocks: Cisco (CSCO)

  • retirement-dividend-stocks-cisco-csco-stockMarket cap: $123 billion
  • Current dividend yield: 2.9%
  • Payout ratio: 34% of projected 2014 earnings
  • Dividend growth: 216% in 4 years, from 6 cents per quarter in 2011 to 19 cents per quarter currently

Cisco (CSCO) just reported earnings on Thursday that topped expectations, but saw shares sell off amid continued top-line troubles thanks to weak enterprise spending.

But regardless of the short-term trends, the important thing to remember is that dividend investing involves holding for the long haul – and looking forward, Cisco is as safe and stable as they come.

Especially now that it just boosted its dividend … again.

We don’t have a long history of CSCO dividends, but the company has ramped up payments in a hurry since instituting its dividend in 2011 from 6 cents to the recently announced rate of 19 cents. Given recent sluggishness, there’s a lot of incentive to keep the pedal down and keep shareholders happy even if revenue remains challenged.

An important thing to remember with long-term dividend investing is that the current yield is not your yield down the road as payments increase.

There’s a lot of reasons to consider buying Cisco on recent softness. CSCO stock has a forward P/E of less than 11, so it’s pretty fairly valued compared with other big tech peers. And it is only paying out about one-third of its profits via dividends, meaning room for continued growth in distributions.

Even if Cisco doesn’t burn down the house with share price appreciation, this dividend stream is what matters most.

Retirement Dividend Stocks: Diageo (DEO)

  • retirement-dividend-stocks-diageo-deo-stockMarket cap: $77 billion
  • Current dividend yield: 2.5% (based on its total 2013 payouts of roughly $2.90)
  • Payout ratio: 48% of projected 2014 earnings
  • Dividend growth: 73% in 10 years, from $1.67 paid in 2003 to $2.90 last year

Diageo (DEO) is the global spirits giant behind such liquor brands as Captain Morgan rum and Smirnoff vodka. And thanks to changing tastes at home in the U.S. and the growth of the liquor biz in emerging markets, DEO stock has managed to see decent growth in the last several years.

But what income investors should really be interested in is the dividend potential.

DEO stock pays a decent yield of 2.5%, and its payments are less than half of total annual profits. Furthermore, the company has a good history of dividend increases over time, sharing its growth with shareholders.

And bigger-picture, there are fewer safe bets in the world than “sin stocks” like alcohol purveyor Diageo. In good times and bad, people like to drink their booze. That makes for a consistent revenue stream and thus reliable dividend payments.

Retirement Dividend Stocks: China Mobile (CHL)

  • ChinaMobileMarket cap: $194 billion
  • Current dividend yield: 4.2% (based on its total 2013 payouts of roughly $2.01)
  • Payout ratio: 41% of projected 2014 earnings
  • Dividend growth: 550% in 10 years, from 30.8 cents per share in 2003 to $2.01 last year

China Mobile (CHL) frequently takes a back seat to domestic telecom stocks like AT&T (T) and Verizon (VZ). But there’s little growth for U.S. telecoms — and more importantly, a miserly history of dividend increases.

While China Mobile has been increasing its payouts steadily over the last 10 years, with a 550% increase in dividends since. AT&T has seen a dividend increase of just 47% in the same period and Verizon just 38%.

The CHL dividend payout ratio is less than half of projected profits, and more importantly, China Mobile has significant growth prospects as China gets increasingly wired. The Asian telecom should report roughly double-digit revenue growth in 2013, after about 9% revenue growth in 2012.

Sure, CHL is in a battered emerging market and there are serious concerns about China’s economy broadly. But the biggest concern is how China will transition from an old manufacturing-based economy into a consumer and technology-driven one — and that means China Mobile is the way of the future.

Besides, it has more than 750 million wireless subscribers — more double the population of the U.S. — and more than 60% share of China’s mobile market. So there clearly is some stability here given its massive scale.

Retirement Dividend Stocks: Old Republic International (ORI)

  • retirement-dividend-stocks-ori-stockMarket cap: $4 billion
  • Current dividend yield: 4.7%
  • Payout ratio: 45% based on FY2013 earnings
  • Dividend growth: 79% in 10 years, from 40.2 cents per share in 2003 to 72 cents last year

Lawrence Meyers called out Old Republic International (ORI) as one of his “secret” dividend stocks recently, and it’s certainly a pick worth pursuing.

Though some might view Old Republic as a boring old insurance company, that’s actually a plus for dividend investors looking for stability. Old Republic started back in 1887 and has a long history and a diverse array of products that mean it has staying power.

And unlike an insurance stock like Allstate (ALL), which is actually paying a smaller dividend now than it did 10 years ago, ORI has been generous with its increases and has seen its payouts more than double since 2003. Looking forward, those increases should continue, too, given the low payout ratio as a percentage of total earnings.

This is a bit smaller than other dividend picks, so there could be a bit of short-term volatility at ORI. But the company seems to be a good bargain with a forward P/E of less than 10 right now and a valuation that is only slightly above book value.

Retirement Dividend Stocks: Huntsman (HUN)

  • retirement-dividend-stocks-huntsman-hun-stockMarket cap: $5.5 billion
  • Current dividend yield: 2.2%
  • Payout ratio: 22% of projected 2014 earnings
  • Dividend growth: 150% in seven years, from 20 cents per share in 2007 to 50 cents last year.

Huntsman (HUN) is also a bit smaller than some of the blue-chip dividend picks out there. Compared with its big brothers in the chemicals space, it is more attractive.

HUN has a price-to-earnings ratio of about 10 based on 2014 forecasts, while Dow Chemical (DOW), 3M (MMM) and DuPont (DD) are all right around 15.

Secondly, it has a heck of a lot more dividend growth potential over time after a 150% increase in payouts since 2007. That blows away the track record of the bigger chemicals stocks. And its very comfortable payout ratio means that those distributions should continue to market steadily higher.

There are risks in being small. After basically flat revenue in 2013, forecast for 2014 indicate 6% revenue growth — which isn’t killer, but is at least higher than Dow or DuPont. There’s a risk that a downturn could create short-term volatility, but Huntsman stock made some significant cost-cutting during the Great Recession that should serve it well no matter where the market goes in 2014 and beyond.

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at or follow him on Twitter via @JeffReevesIP

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