Safety and predictability are great to have when planning for retirement. However, today’s retirees are more challenged than ever to conservatively produce safe income from dividend stocks. Interest rates are near rock bottom, valuations are running high relative to history and a rate increase from the Federal Reserve could be right around the corner.
Furthermore, many dividend-paying stocks have seen their yields compress over the last few years as investors stampeded into anything with yield. With the economy’s slow growth, dividend growth has also begun to wane.
We set out to find some exceptional dividend stocks that are solid choices for current dividend income and income growth in retirement portfolios. With starting dividend yields between 2% and 5%, this group of blue-chip dividend stocks offers a good balance of safety, yield and growth.
Here is a group of 10 dividend stocks that currently have good yields (3% or greater), and dividend stocks that don’t necessarily have great yield but have excellent dividend growth. We found wide moats with all of them, and investors can learn more about how to build a dividend portfolio here.
Let’s meet the 10 best dividend stocks that form a strong foundation for most retirement portfolios.
Best Dividend Stocks for Retirement: Target Corporation (TGT)
Dividend Yield: 3.5%
Target Corporation (NYSE:TGT) is the nation’s second largest retailer behind Wal-Mart Stores, Inc. (NYSE:WMT), which is a big position in Warren Buffett’s dividend portfolio. TGT’s familiar red and white bullseye is on 1,793 stores located just about everywhere in the U.S. you can imagine. Target generates over $70 billion in revenues each year.
TGT is a mature retailer. Annual revenue growth is under 2% over the last five years, and the pace of new store openings has slowed. However, successful cost management has resulted in annualized growth of 5.8% in diluted earnings-per-share and nearly 10% annual growth in free cash flow per share over the last five years. TGT is clearly adjusting to its mature status.
Online shopping is changing the face of traditional retailing. Target is adapting with Target.com, but e-commerce still represents a relatively small portion of its online business.
It’s hard to say how the online shopping world will evolve, but there will certainly be continued pressure on TGT and all other brick-and-mortar players to invest heavily in the space. Fortunately, the slowdown in new store openings frees up cash for these investments. Target is a very safe source of income for dividend investors: The current $2.40 per share dividend offers investors a nice yield of 3.5%. Target has paid uninterrupted dividends since the business became publicly held in 1967, and management has raised the dividend for 45 consecutive years.
In addition to its dividend longevity, TGT’s payout growth has been impressive. Target has increased its dividend by over 20% annually during the last five years and rewarded shareholders with a 7% boost earlier this year — even despite its slow sales growth and mature business status.
TGT’s dividend payout represents 42% of earnings and 45% of free cash flow. These are healthy levels that provide safety and room for dividend growth. The existing store base is highly profitable and recession-resistant as well. Target’s balance sheet is also in good shape.
Overall, TGT offers a nice combination of yield and dividend growth. Conservative investors looking for safe income and a predictable business should take a closer look at Target.
Best Dividend Stocks for Retirement: Lowe’s Companies, Inc. (LOW)
Dividend Yield: 2%
As a well-known adage in the retailing business goes: There is nothing wrong with being No. 2. In the home improvement business, that fits Lowe’s Companies, Inc. (NYSE:LOW).
With 1,840 home improvement stores and nearly $60 billion in sales, LOW is a regular stop for customers in all 50 states, Canada and Mexico.
The company’s presence in Canada was recently enhanced by its $3.2 billion acquisition of RONA, a leading retailer and major distributor of building products and hardware. The financial crisis in 2008 dealt a painful blow to housing, but that’s a distant memory. Home building and remodeling is one of the consistently bright spots of the economy.
The building and home improvement industry over time has increasingly evolved into an oligopoly led by big box retailers like Home Depot Inc (NYSE:HD) and Lowe’s and followed by Ace Hardware and Sherwin-Williams Co (NYSE:SHW). There are others, but these guys are the price leaders, and this is where the war is fought.
But the real battle is between LOW and HD. Home Depot’s strategy is based on maximum size, while Lowe’s focus is on stocking fewer but faster-moving items. LOW’s growth strategy relies not just on building new stores but acquiring existing chains. Lowe’s may have fewer stores than Home Depot today, but this disadvantage is neutralized by LOW’s aggressive pursuit of the online shopper.
The current $1.40 per share annual payout offers investors a 2.0% yield. The average dividend-paying company may offer better current yields, but Lowe’s dividend is extremely safe with superb growth prospects.
The company’s dividend has been compounding at a 21.7% rate over the last 20 years, and LOW has raised its dividend over 50 consecutive years. Lowe’s is a member of the dividend kings list (see all the dividend kings here).
Strong dividend growth will continue. The company’s free cash flow payout ratio has been hovering around the 25% level this decade, so there is plenty of cushion. LOW’s last dividend increase was a 25% boost earlier this year, too. Again, as the saying goes, there is nothing wrong with being No.2.
Best Dividend Stocks for Retirement: Public Storage (PSA)
Dividend Yield: 3.4%
One person’s junk is another’s precious possessions. This simple premise is what Public Storage (NYSE:PSA) is all about. With 2,593 locations, PSA is the industry’s No.1 player with over $2.4 billion in annual revenue
Public Storage makes its money by developing, acquiring and renting self-storage lockers by the month. They have a side business offering insurance against property loss. PSA is an equity real estate investment trust. This simply means that at least 90% of income must be paid to shareholders for the company to avoid paying federal taxes.
Competition for desirable locations is a key component of the self-storage business, and demand is growing as more households are comprised of apartment dwellers, where the amount of square footage is smaller and storage space is at a premium. This is especially true with younger consumers that are starting their working lives.
The battle for desirable locations to serve this market matters. PSA is the largest with the least leveraged balance sheet. This gives it the ability to grow either from the ground up or via acquisition. The company maintains a high occupancy rate that typically runs over 90%, so this generates a steady high level of cash flow. Public Storage also benefits from being able to increase prices steadily on its customers, who face switching costs to move to another storage company.
The current $7.20 per share annual payout offers investors an above average 3.4% yield. The quarterly dividend was increased 6.5% in June to $1.80 per share. PSA appeals to retirees seeking dividend growth. Over the last 20 years, dividends have compounded at a 10.5% annual pace. Annual dividend growth clocked in at 13.1% and 16.3% over the last decade and five years, respectively, as well.
This solid dividend growth demonstrates a high level of consistency to the company’s business model. With an operating margin hovering close to 50%, there is plenty of cash flow to keep a good pace of growth going forward.
Best Dividend Stocks for Retirement: Omnicom Group Inc. (OMC)
Dividend Yield: 2.7%
Omnicom Group Inc. (NYSE:OMC) is more than the world’s second largest advertising agency. For its list of Fortune 500 companies, it offers services like customer relationship management, public relations, media planning, digital and interactive marketing and brand consulting. In other words, OMC offers the whole nine yards of product and corporate marketing.
Omnicom is an amalgam of several smaller enterprises in 1986 that included Madison Ave legends like, BBDO Worldwide, Doyle Dane Bernbach and Needham Harper Worldwide. Altogether, OMC totals more than $15 billion in billings.
Revenue is split fairly evenly between the U.S. and international.
There are few barriers to entry in any of Omnicom’s businesses. As a service business, the most important assets leave the office at the end of the day. Therefore, relationship, reputation and service are critical to prospering in the business.
OMC stands out for the crowd in three ways. Its group members are icons in the advertising business. Its global services are critical for the many multinational companies that comprise the Fortune 500. The diversity of services provides multiple opportunities to serve clients.
Omnicom’s revenue base is also diversified. This is an important factor in OMC’s stability. The 100 most important clients amount to about half the business. Clients represent virtually every industry, with no sector more than 13% of total sales.
The current $2.20 annual payout offers investors a 2.7% yield. The payout is very safe, and the dividend has compounded by 13.1% per year over the last 20 years and by 20.1% annually over the last five years.
OMC is an excellent cash generator with operating margins holding steady around 13% to 15% and a bank account filled with $1.5 billion there is lots of liquidity to cushion almost any event. The dividend payout ratio of 52% of EPS is at a five-year high, but there is still plenty of room for further dividend growth.
Best Dividend Stocks for Retirement: VF Corp (VFC)
Dividend Yield: 2.7%
VF Corp (NYSE:VFC) is one of the world’s largest apparel companies. It climbed to the top by acquiring the rights to brands famous for fashion but short on management. However, VFC is not an overnight sensation.
It has been doing business since 1899, picking up names along the way like Wrangler, Vans, The North Face, Timberland, Lee, Jansport and Nautica.
VFC manufacturers offshore and sells it goods worldwide through department, specialty and mass merchants. This represents about three-fourths of the volume. The company also makes its money through the operation of its own retail stores that account for 25% of its $12 billion-plus in annual revenues. Geographically, North America buys about 70% of VFC’s brands, Europe 20% and Asia the remaining 10%.
There are very few barriers to entry in the fashion apparel business. Anyone with a needle and thread can do it. Achieving brand recognition on a sustainable basis, however, is a big challenge. This is where VFC’s strong and enduring brands give it a competitive edge. Over the years, the company has collected top brands that appeal to a young fashion-oriented crowd, relocated production offshore and reaped the benefits.
Anyone can find low cost offshore production, but having the capital, logistics and marketing power is what separated VFC from the rest of the pack.
Dividends have been increased for over 40 consecutive years, making VF Corp a member of the exclusive dividend aristocrats list. Investors can view data on all of the dividend aristocrats here. The current $1.48 per share payout offers a 2.7% yield. Over the last five and 10 years, annual dividend growth has averaged close to 17%.
VFC’s dividend is considered extremely safe thanks to the company’s low payout ratio near 35%. There is ample room to grow the business and the dividend as well.
Best Dividend Stocks for Retirement: Lockheed Martin Corporation (LMT)
Dividend Yield: 2.8%
Lockheed Martin Corporation (NYSE:LMT) is the world’s largest defense contractor. It is well known for building missiles and much more. LMT also researches, develops and manufactures advanced technology services like cyber security for the U.S. government (80% of sales) and certain foreign military organizations (20%).
The business is managed in five segments: Aeronautics (32% of sales), Information Systems & Global Solutions (17%), Missiles and Fire Control (17%), Mission Systems and Training (16%) and Space Systems (18%).
The defense industry has extremely high barriers to entry. Becoming approved for bidding on government contracts is difficult and time consuming. For more than 30 years, the industry has consolidated into 10 or more larger entities and many small specialty suppliers. Government contracts typically extend over multiple years with progress payments made at certain milestones. This helps relieve contractors from the heavy cost of internally financing all of their business.
Defense spending growth has slowed in recent years but that has not stopped Lockheed. Over the last five years, diluted earnings per share for LMT have grown at a compound annual growth rate of 8%. Lockheed’s operating margins of 11.8% are at least average for the industry and have remained fairly steady over the last decade, underscoring its moat.
The annual dividend payout of $6.60 per share of LMT offers an above average yield of 2.8%. The company pays out only 40% of free cash flow as dividends, which provides nice safety and plenty of room for continued growth.
Speaking of dividend growth, Lockheed has increased its quarterly dividend by at least 10% for 14 years in a row. LMT’s dividend has compounded by 19.3% per year over the last decade and should continue seeing nice growth.
Best Dividend Stocks for Retirement: Accenture Plc (ACN)
Dividend Yield: 2.1%
In a business world marked by rapid change, the trend is to outsource of all types of services. Coordinating these changes is when the call goes out to companies like Accenture Plc (NYSE:ACN).
With over 350,000 experts in their global army, Accenture generates over $31 billion in revenues. According to Consultancy.uk, ACN ranks No.5 on a global scale.
Accenture has five reporting segments and primary market channels, organized around 13 industry groups that offer expertise over virtually every category of business from Asset Managers to Zoo Keepers. Overall, the firm serves clients in more than 40 industries.
The consulting business is highly concentrated with the 10 largest companies controlling approximately about half the market. ACN holds a share of just over 3% and should have plenty of room to continue growing its business. Consulting is a low fixed cost business. The real assets amount to the human and technical expertise. Anybody with a computer and a business card can enter the business, but brand reputation and breadth of expertise are keys to gaining large corporate clients.
Technology issues like cyber security and digital media are two of the fastest growing areas of the business, and Accenture places a strong focus here. In fact, Digital-related, cloud-related and security-related services now represent close to 40% of Accenture’s revenue and are growing at a double-digit clip.
More bodies mean more business, too. ACN has formed many strategic alliances with companies that have capabilities that offer new technology or are in geographic areas not already served by Accenture. The current $2.42 per share dividend payout offers investors a 2.1% yield. This is a little above average for an S&P 500 company, and investors should note that ACN follows a semi-annual payout schedule. While Accenture’s yield is a little low for most retirement portfolios, the company’s dividend growth can help make up the difference.
ACN’s dividend has grown by 21.6% per year over the last decade and 20.6% annually over the last five years. The company raised its dividend by another 10% last month. Accenture’s payout ratio has been trending higher from 28% in 2008 to just over 40% last year, but this still leaves plenty of cash flow to cover ongoing operations, any unexpected events and the dividend.
ACN’s bank account also holds enough cash to pay the current dividend for nearly four years. The dividend is extremely safe with bright growth prospects.
Best Dividend Stocks for Retirement: Pfizer Inc. (PFE)
Dividend Yield: 3.6%
If there were such a title as King of Blockbuster Drugs, Pfizer Inc. (NYSE:PFE) would be in the final voting round.
Drugs such as Zoloft, an antidepressant, Lipitor, for lowering blood cholesterol and Viagra, used to treat erectile dysfunction, are all part of Pfizer’s massive portfolio. Oh yes, there is also Enbrel, Eliquis and Lyrica.
If these are all familiar names, it is probably due to their heavy budget for television advertising. PFE’s near $50 billion in revenues makes it the world’s third largest pharmaceutical maker, but its $22 billion in profits ranks No.1. That’s why the title of King is earned.
Pfizer has been around since 1849, it provides employment to 78,300 and it sells its goods in over 100 countries. Some 56% of Pfizer’s total business comes from outside the U.S. Long time followers know that the pharmaceutical business is research intensive, highly regulated and requires massive amounts of time and capital to enter.
With that said, the pharma industry is under attack for its method of setting and raising drug prices. However, the Affordable Care Act has had only limited success controlling prices. Prices continue to rise well above average. PFE stands out by its approximate $8 billion of spending on drug research and development. There is no guarantee that money alone will produce the next blockbuster, but it gives the company a good chance of continuing to fill its pipeline.
Pfizer has over 290 research projects going on today and it has made a series of acquisitions. This shows it isn’t placing all its bets on a few hot areas. This might just be the secret behind PFE’s research success. The current $1.20 per share annual dividend payout offers investors a well above average 3.6% yield. With long-term operating margins averaging over 25%, Pfizer generates loads of cash flow. The company also enjoys strong demand for its products throughout all economic environments.
The current payout ratio of 55% of free cash flow is right about at the average of the last decade. This suggests that the 9.9% average growth of dividends over the last 20 years is possible for PFE investors to experience as the company moves forward.
For retirees seeking safe yields with reasonable growth prospects, Pfizer appears to offer a solid combination. Our full thesis on PFE can be read here.
Best Dividend Stocks for Retirement: Travelers Companies Inc (TRV)
Dividend Yield: 2.4%
Travelers Companies Inc (NYSE:TRV) wrote $23.2 billion in premium revenues last year, ranking as the fifth largest property casualty insurance company in the nation. The company provides a broad range of personal and business insurance.
Risks are geographically diversified. California and New York each represent about 9.8% of its business. Texas accounts for 7.3%. No other state is as much as 5%. Altogether, the 50 United States amount to 93% of sales with international sales accounting for the remaining 7%.
The insurance business is heavily regulated and intensively competitive. The five largest companies control less than 30% of the market. According to The Insurance Information Institute, TRV is in the No.5 position and holds just 3.9% of the market.
The P&C insurance business has its own business cycle. Pricing runs counter-cyclical to Mother Nature. In the absence of fires, floods and other disasters, prices fall. One good hurricane and prices rise. It is easy to see why geographic diversification is important.
Auto and Homeowners insurance providers are big television advertisers. Travelers spends less on advertising in this channel than several of its competitors. TRV’s strength appears in its high percentage of policy renewals, solid risk management and distribution supported by 11,000 independent agents.
Traveler’s dividend is super safe with strong growth qualities. In fact, the insurance rating agencies give gold stars to TRV’s financials.
The current $2.68 per share annual payout offers investors a 2.4% yield. The payout ratio of just 25% is right on the 10-year average and leaves room for unpredictable events.
Travelers has also grown its dividend for 12 consecutive years, recording a compound annual growth rate of nearly 10% over that time. The last dividend increase for TRV was a 10% raise earlier this year.
Best Dividend Stocks for Retirement: Ventas, Inc. (VTR)
Dividend Yield: 4.4%
Ventas, Inc. (NYSE:VTR) is the nation’s second largest publically owned healthcare focused REIT. As a REIT, VTR is required to pay out at least 90% of its taxable income to avoid federal taxes at the corporate level. This results in high yields for dividend investors.
Ventas’ investments encompass Senior Housing Communities (70% of revenue), Medical Office Buildings (18%), Specialty Hospitals (4.4%), Skilled Nursing Facilities (2.2%) and Acute Hospitals (1.8%). The balance (2.6%) is from loans and related investments.
The company’s investment properties are spread throughout the United States, Canada and the United Kingdom. VTR is not a healthcare operator, rather it invests in properties that are leased to operators such as Brookdale Senior Living, Inc. (NYSE:BKD), Sunrise and others. These operators offer high quality private pay facilities and tend to have 90%-plus occupancy rates, providing Ventas with predictable rent payments.
The demand for senior healthcare is also underscored by the inflow of 10,000 people turning 65 each day. VTR management maintains that even a 1% increase in senior living shares of this demographic group would require a doubling in the current number of senior housing units.
The business of investing in healthcare properties is limited by capital availability. Return on investment depends of property prices, interest rates, occupancy rates and the cost of maintaining or upgrading facilities. Senior Living and related healthcare service operators like Brookdale and Sunrise are heavily regulated; REIT’s need to be certain that their partners are in compliance.
The current $2.92 per share annual payout offers investors a yield of 4.4%. The payout has grown annually by 7.8% over the last 10 years and by 7.3% per year over the last five.
VTR is an attractive REIT for retirees because of its recession-resistant business, high yield and reliable payout growth.
As of this writing, Simply Safe Dividends was long ACN and OMC.