Image source: Flickr user Simon Cunningham.
It's been shown that long-term investing outperforms short-term trading, and that dividend-paying stocks outperform their non-dividend-paying peers. Because of that, dividend-paying stocks can be perfect for retirees to own in their portfolios. However, not every dividend-paying stock is worth owning.
For example, some companies have a high-dividend yield because their businesses are faltering. To help retirees separate the good dividend-paying stocks from the bad, I scoured the dividend-paying universe of stocks, and came up with five investment ideas that may be worth including in retiree portfolios.
Image source: Microsoft.
Microsoft Corp (MSFT -0.66%) is successfully transforming itself from a Goliath in the dying PC industry to a Goliath in the rapidly expanding cloud-computing industry. Yes, Microsoft still makes the operating system that runs the vast majority of computers in the world -- Windows 10 is installed on more than 200 million devices -- but it's also leveraging its leadership in business software to create recurring revenue streams. For instance, Microsoft's iconic Office software -- think Excel and Word -- is now available in the cloud from any internet-connected device.
It's not just Office that's migrating to the cloud. Other business-software services that were once siloed on systems are being set free in the cloud. As a result, Microsoft's C-suite projects that cloud-based revenue will grow from about $10 billion per year now to $20 billion per year in 2020.
Couple Microsoft's cloud success with ongoing success in gaming via Xbox and search via Bing, and you've got a top-tier technology company that's likely to kick-off mounds of shareholder-friendly cash flow in the coming years. The company's already sitting on $100 billion in cash and investments, and with a bulletproof balance sheet, there's plenty of room for dividend increases. Currently, shares yield a healthy 2.8%.
Image source: ExxonMobil.
Investors shied away from energy stocks last year as crude oil prices dropped, but they're starting to warm up to energy stocks likely to capitalize on industry weakness. On the list of energy stocks perfectly positioned to gobble up attractive assets from struggling peers, no company probably tops ExxonMobil (XOM -0.05%).
Despite struggling oil prices, ExxonMobil still generated $16.2 billion in earnings last year, and $1.8 billion in earnings during the first quarter of 2016. ExxonMobil produces, refines, and markets energy and chemicals products. As a result, it's got broad-based exposure to energy and industrial production that insulates it from the hit-and-miss nature of production-only oriented companies.
Importantly, ExxonMobil is generating mountains of cash -- $5 billion in first-quarter operating cash flow -- so it has plenty of financial flexibility to keep dividend checks flowing, and to take advantage of fire sales by peers. The company is arguably navigating the poor oil-and-gas pricing market better than anyone, so picking up shares, and pocketing a 3.36% dividend yield along the way, makes a lot of sense to me.
Image source: Gilead Sciences.
Gilead Sciences (GILD -0.56%) earned its chops developing cutting-edge medicine that has transformed HIV from a life-ending disease into a chronic disease. In the process, the company has used the cash that it kicked off from sales of its HIV drugs to develop game-changing therapies in hepatitis C, as well.
The company's Sovaldi and Harvoni, the two top selling hepatitis C drugs on the market, hit the market in 2014, and Gilead Sciences' sales have tripled because of them. However, hepatitis C sales are admittedly plateauing, and that's led some growth investors to sell their shares and look elsewhere.
Walking away from Gilead Sciences, however, might be a mistake. The company's growth pause could be temporary, because even after plowing billions into R&D programs to discover new medicines, it still has one of the best balance sheets in biotechnology. Exiting March, Gilead Sciences is sitting on $21 billion in cash that it can use for acquisitions, share buybacks, and dividend payments.
How (and when) Gilead Sciences uses that cash is a matter of debate among industry watchers; but even if it avoids M&A and focuses solely on internal R&D, it could still end up with additional billion-dollar blockbusters. For instance, the company's making a big bet on drugs to treat nonalcoholic steatohepatitis, or NASH, an increasingly common cause of liver transplant. The company's got four different drugs targeting NASH in clinical trials.
Overall, Gilead Sciences should be on retirees' short lists of stocks to buy. The company boosted its dividend by 10% recently, and shares are now yielding 2.1%. Gilead Sciences' shares also appear to be dirt cheap right now given that they have a forward P/E ratio of about seven.
Image source: HCP, Inc.
HCP, Inc. (PEAK 1.40%) isn't a household name like the others on this list, but it probably should be because its properties and tenants span all of healthcare, from senior housing to life sciences. This REIT engages in the acquisition, development, leasing, selling, and managing of healthcare real estate. That means it will benefit from rising demand for healthcare associated with aging and longer-living baby boomers.
Soon, HCP plans to spin-off a new REIT comprising of its skilled nursing and other post-acute healthcare facilities. After that's done, HCP will generate 54% of its business from senior-living properties, like Brookdale. Because 10,000 baby boomers turn 65 every day, the tailwinds associated with senior housing should remain strong for decades.
HCP's life sciences and medical office properties are similarly attractive because these properties are often custom built to strict requirements that limit tenant turnover. Currently, the occupancy of its life-sciences properties is at an all-time high of 98%.
Overall, HCP has a solid balance sheet and operates in an attractive market, and that makes its 6.9% dividend yield especially attractive to retirees.
Image source: Pfizer, Inc.
Pfizer, Inc. (PFE -1.05%) is only now emerging from a multi-year restructuring that has left it lean, and ready to profit from a return to top-line growth. The company lost patent protection on its $13 billion cholesterol-busting drug Lipitor in 2011. As sales slowed, Pfizer was forced to ratchet down spending on SG&A, focus its R&D programs on low-risk/high-reward projects, and spin off non-core assets.
Now that Lipitor's sales have finally dropped to levels that mean smaller headwinds, its restructuring is paying off. Pfizer has delivered six-consecutive quarters of stand-alone operational growth, and recently, the company bumped up its full-year forecast for sales and profit.
The company expects sales of at least $51 billion this year, up $2 billion from its previous projection, and EPS of at least $2.38 this year, up from a prior outlook for $2.20. For comparison, sales and EPS were $49 billion and $2.20, respectively, in 2015.
There's plenty of reason to think that growth is just at the beginning, too. Last year, the company acquired specialty drugmaker Hospira for $17 billion in a move that catapulted it to the front of the emerging market for biosimilars -- or drugs that work like, but aren't exact copies of, biologics. Biologics are among the biggest-selling medicines in the world, and Pfizer estimates that the market for biosimilars will reach $17 billion by 2020. Additionally, Pfizer's R&D programs are paying off, too, with new and fast-growing drugs such as the cancer drug Ibrance, and the anticoagulant Eliquis.
Pfizer's got plenty of cash -- roughly $40 billion in short- and long-term cash and investments -- so its dividend appears safe. Also, because the company's returning to growth, the payout could climb steadily from here. If so, then retirees may see the shares' current 3.44% yield tick up higher.
Tying it together
Retirees should focus on both quality and income, not yield alone. In that respect, these five investment ideas appear very attractive. Each of them are top-tier players in their respective markets, and has a yield that is respectable enough to generate much-needed retirement income. In my book, that makes them perfect for retirement portfolios.
