Dividend stocks are a core part of many retirement portfolios. But dividend investing is at a unique point in market history, with T-bills yielding 5%. That raises the bar for “high-yield” stocks, since stocks can fall heavily in price. In this article, I toe the line between yield and stability.
Reaching for yield is a particularly risky strategy right now, even for long-term thinkers. So, I scoured the 30 stocks in the blue chip Dow Jones Industrial Average and chose four that I think are worth consideration for retirement portfolios. As of this writing, the S&P 500 yields only 1.5%, so I defined high yield as being above that level.
Understanding Dividend Stocks In Retirement
Steady dividend payments can be very attractive to investors nearing retirement age and looking for cash to take them through the retirement years. High-yield dividend stocks are normally found in companies that are mature, well-established and have a positive long-term record.
There are still risks with high-yielding stocks. Even the most established company can experience a downturn and cut its dividends or quit paying them all together. In fact, even two of the Dow Jones Industrial Average members (Boeing
BA
and Disney) suspended their dividend payments in 2020 during the early stages of the pandemic. You should also be aware that any company that seems to show an especially high dividend yield ratio should be examined closely. This could be because the company’s stocks are dropping in value, making the dividend ratio higher than normal.
Dividend Stocks Explained
Dividend yield is a ratio that shows how much income you earn in dividend payouts per year for every dollar invested in a stock. Not all stocks pay dividends. Dividend-yielding stocks usually pay their shareholders in cash, but dividends can also be paid in stocks or other property. Most U.S. companies pay out dividends quarterly. The formula used to calculate dividend yield is: dividends per share divided by price per share.
Dividend yield is expressed as a percentage point. Lets say a utilities company cost $50 per share, and was paying out annual dividends equal to $2.00 per share. We would divide $2.00 by $50, which equals 0.04. Converting that to a percentage gives you 4%. This means you would earn 4% in dividends per year for this example.
The companies that pay out higher dividends are typically well-established, mature companies. New start-ups that are growing quickly usually pay less in dividends. The best companies for paying high-yielding dividends are mature companies in sectors that are non-cyclical. In other words, companies that are not as affected by shifts within the market. Even during times of economic difficulties or market volatility, these companies don’t fluctuate much in value, because regardless of economic conditions, they are a necessity. A good example of this would be stocks in a utility company.
Dividend Stock Advantages for Retirees
Dividends can provide a steady stream of cash without having to dip into your principal, providing a reliable passive income for the retiree. When investing in a dividend stock, the investor can profit in two ways; first by having regular payouts of dividends to supplement other retirement income, and second by having their original investment increase in value. The stability from investing in established companies adds security to investments during retirement, when this could be the main source of income. High-yield dividend stocks can also produce enough dividend returns to help your retirement income outpace inflation.
Many investors need both growth AND income to meet their retirement cash goals. The Forbes Investment team has identified five companies that pay you to own them as they grow in Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.
The Best High Yield Dividend Stocks For Retirement
Dividend consistency (paying every single year) is a major sign of corporate stability because it shows the company’s commitment to returning a portion of profits to shareholders, year in and year out. That’s what a dividend is. And the only companies that can pay dividends year after year are those that are serially profitable.
Companies that crush it one year, then are victims of a bad economy or some company-specific issue the next year, will find it difficult to pay dividends each year or increase them every year. Earnings can be manipulated, but dividends have to be paid in hard cash to shareholders. That’s a big difference.
The following four top choices fit squarely into corporate stability and dividend consistency: International Business Machines (IBM), Chevron (CVX
CVX
), Coca-Cola
KO
(KO) and Johnson & Johnson
JNJ
(JNJ). All of these companies are well-established and profitable to the point that they are well-known names.
1. International Business Machines (IBM)
- Industry: IT Consulting and Other Services/Information & Technology
- Market cap: $135 billion
- Recent stock price: $148.79
- Dividend yield: 4.5%
- Payout ratio: 87%
- Dividend frequency: Quarterly
- Revenue: $61 billion
- EPS: $7.60
- Price to sales ratio: 2.3
- Price to free cash flow ratio: 12.0
- Earnings yield: 5.1%
- Profit margin: 11.3%
Company Overview
Founded in 1911, there was a time when this was the company people thought of first when it came to “hot tech stocks.” It has long since become a mature company and a household name associated with computers. IBM is well-known for being a pioneer in the computing industry and reinventing itself from punch cards and electric typewriters in the mid-1900s to the modern desktop computers to technology consulting.
Why It Is A Top Pick
Since the late 1900s on, IBM has successfully weathered the increasing changes within the information and technology sector by continuing to restructure, innovate, and diversify when needed. On November 7, 2023, IBM announced it is launching a $500 million venture fund to invest in a range of AI companies.
2. Chevron (CVX)
- Industry: Oil & Gas Integrated/Energy
- Market cap: $269 billion
- Recent stock price: $142.81
- Dividend yield: 3.2%
- Payout ratio: 44%
- Dividend frequency: Quarterly
- Revenue: $202 billion
- EPS: $13.5
- Price to sales ratio: 1.3
- Price to free cash flow ratio: 13.3
- Earnings yield: 9.4%
- Profit margins: 12.6%
Company Overview
Chevron’s history is tied closely to that of the growth of the United States as a world power. The company merged with one of its biggest competitors, Texaco, in 2001. But decades before that, what is today CVX was once part of Standard Oil, dating back to just after the Civil War. Chevron expanded globally throughout the latter half of the 20th century and is now a global leader in oil & gas. Recently, in response to shareholder and government pressure, Chevron has begun investing in alternative energy sources via partnerships and collaborations, such as hydrogen and biomethane, as well as carbon capture, utilization and storage, and offsets.
Why It Is A Top Pick
While alternative forms of energy have made inroads, fossil fuels are likely here for a long time. Chevron has the size and stability to evolve with the industry’s changes and consumer preferences.
Many investors need both growth AND income to meet their retirement cash goals. The Forbes Investment team has identified five companies that pay you to own them as they grow in Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.
3. Coca-Cola (KO)
- Industry: Beverages-Non Alcoholic/Consumer Defensive
- Market cap: $245 billion
- Recent stock price: $56.64
- Dividend yield: 3.2%
- Payout ratio: 72%
- Dividend frequency: Quarterly
- Revenue: $45 billion
- EPS: $2.80
- Price to sales ratio: 5.5
- Price to free cash flow ratio: 24.2
- Earnings yield: 4.4%
- Profit margins: 23.9%
Company Overview
What started as a U.S. company thriving on a single soda product is today a global beverage giant, operating in more than 200 countries. Recently Coca-Cola has launched 100% recyclable plastic bottles across Canada, as one example of its ongoing packaging sustainability. Coca-Cola also continues to develop products and strategies using a range of technology.
Why It Is A Top Pick
The stock is not cheap on a fundamental basis, but it historically is awarded a higher valuation based on its stability and market leadership. Coca-Cola has historically remained on top of market trends and consumer expectations, delivering evolving products and strategies to meet sustainability, diversity and inclusion goals.
4. Johnson & Johnson (JNJ)
- Industry: Drug Manufacturers – General/Healthcare
- Market cap: $354 billion
- Recent stock price: $147.14
- Dividend yield: 2.4%
- Payout ratio: 34%
- Dividend frequency: Quarterly
- Revenue: $98 billion
- EPS: $7.20
- Price to sales ratio: 3.6
- Price to free cash flow ratio: 24.4
- Earnings yield: 9.2%
- Profit margins: 32.5%
Company Overview
Johnson & Johnson was founded in 1886 and has been traded publicly since 1944. Recently J&J has come under scrutiny for its high price tags on critical drugs, and has started to reach deals with companies to produce generic brands of its patented drugs. J&J also announced plans to expand into testing surgical robotics in 2024.
Why It Is A Top Pick
The company has always been on the forefront of innovation in healthcare; expanding into global markets as well as new technology and medicines. There are only two companies that have straight AAA bond ratings (from all major rating agencies). JNJ is one of them (Microsoft
MSFT
is the other), which is a sign of dividend stability and strength that some investors consider a fair tradeoff for more modest earnings growth.
Methodology Used
I chose these stocks by starting with the 30 components of the Dow Jones Industrial Average, and looked for the best combination of dividend yield and valuation (particularly based on sales and cash flow). I also made a point of choosing no more than one company from a sector.
Dividend Stocks Vs. Bonds For Income
Stocks, even well-established dividend stocks like the four in this article, are more volatile than government bonds since they are susceptible to daily financial market fluctuation. This is especially true during times when it looks like the entire financial market is heading into a downturn. However, bonds are not as safe and secure as one would sometimes like to think. They are vulnerable to inflation and changing interest rates.
While a 5% bond, backed by the U.S. government may seem like a good plan right now, if interest rates continue to fluctuate as they most likely will in the coming months, that 5% bond is no longer appealing.
Historically speaking, high-yielding dividend stocks trump bonds every time. Also, keep in mind that while investing in dividend stocks, besides seeing return by collecting dividends every quarter, the original investment also has the potential to go up in value over the long term.
Are Dividend Stocks Right For You?
When analyzing whether dividend stocks are the right investment for you, there are several things to consider. Successful investment is always about finding the right balance between risk and return. Generally speaking, investors who are heading into retirement and need a fixed income to carry them through the golden years are looking for investments with the best return for the smallest possible risk.
This is what could make dividend stocks a good fit for the retired investor: The companies listed in this article are companies with a long track record of mitigating risk, navigating volatile markets and producing comfortable dividends for their shareholders.
Bottom Line
High-yielding dividend stocks are an investment vehicle that appeals to many retirees because of the track record of these companies. IBM, Chevron, Coca-Cola, and Johnson & Johnson are all household names for a reason: these companies have weathered many storms and continue to maintain profits and payouts to their shareholders.
Read Next
Many investors need both growth AND income to meet their retirement cash goals. The Forbes Investment team has identified five companies that pay you to own them as they grow in Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.
Read the full article here