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Retirement income comes from three places -- good ol' Uncle Sam, one's hard-earned savings, and pension plans. But let's face it...the future looks bleak for Social Security and the days of pension plans are fast dwindling. So what's a Foolish investor to do?

Swelling liabilities and expanding lifespans
In 1950, many folks retired with a congratulatory pat on the back, a gold watch, and a guaranteed monthly paycheck. Those days are over for most folks, though, as unfunded pension liabilities are mounting. The nation's largest pension fund, $230 billion California Public Employees' Retirement System (CalPERS), is one such example. A major reason for bloated pension liabilities: People are living longer.

According to the CDC, in 1950 the average male was expected to live to age 65. By 2007, that figure had jumped to age 75. In 2020, life expectancy is projected to be more than 77 years for males and almost 82 years for females. With several decades in retirement, inflation is an investor's worst enemy.

Dividends are important for beating inflation because they allow investors to pay for bread, milk, and gas at future prices (and who knows what those will be). Looking at the S&P 500 index over the past 70 years, dividends grew about 6% annually while inflation rose by 4%.

You can outpace inflation by buying rock-solid companies that pay great dividends. I've compiled a list of some of my favorites based on the following criteria:

  • Attractive industries. Potential rivals have a tough time breaking into these companies' lines of work, and tough economic times won't necessarily keep stocks like these from thriving.
  • Strong competitive positions. Brand dominance or special niches help these tenacious companies sustain long-term profitability.
  • Tenured management teams. Good management teams at the helms of these companies act in the best interest of shareholders.
  • Solid financial positions. These companies are characterized by robust balance sheets and impressive cash flows.
  • Dividend payers. Companies like these pay excellent dividends and have increased them for years.

Five income-generating stocks that fit these criteria to a T are listed in the chart below. All five companies boast at least A-rated debt.


Dividend Yield

Dividend Paid Since

Number of Years of Consecutive Dividend Increase

Quick Reason

Johnson & Johnson


3.5% 1944 49 Products so ubiquitous that Tylenol, Band-Aid, and Visine are commonly used to refer to generic counterparts. Valuable and promising pipeline. One of few companies with debt rated AAA by both Moody's and Standard & Poor's.

Procter & Gamble

(NYSE: PG  )

3.1% 1890 55 Unparalleled portfolio of more than 250 brands. Vigorous innovation pipeline. Nearly two dozen brands generate sales in excess of $1 billion; around 20 more generate sales between $500 million and $1 billion.



2.6% 1916 54 More than 60,000 products including Scotch Tape and Post-it notes. Strong R&D program. Manufactures chemical abrasives that help extract crude oil from the Canadian oil sands.

NextEra Energy


4.0% 1944 16 Industry leader in the use of alternative energy. Largest generator of wind power in the country. Industry leader in solar power.



2.9% 1912 24 Industry leader in profits, cash flow per barrel produced, and return on capital employed. Promising new projects in liquefied natural gas in Australia and the Gulf of Mexico.

Source: The Motley Fool, Yahoo! Finance, companies' 2011 annual reports.

Companies can increase, decrease, or suspend their dividends at any time. However, each of these companies has been paying a dividend since at least the second Roosevelt administration.

Need more invitation to ponder dividend-paying stocks? Consider this. During our most recent lost decade, the median return on stocks with a market cap above $1 billion was a whopping 3.2% loss. But in that group, stocks that paid at least a 3% dividend yield saw a 28% median return. Dividends act as shock absorbers for your portfolio in flat markets. And I'm always a fan of helping fellow Fools create a little more income.

You'll find additional great ideas for dependable, income-generating investments in a free report crafted by my Foolish cohorts: Secure Your Future With 9 Rock-Solid Dividend Stocks.

Fool contributor Nicole Seghetti likes helping people make more money. She owns shares of Johnson & Johnson, Procter & Gamble, 3M, and NextEra Energy. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, Johnson & Johnson, 3M, and Chevron, as well as creating diagonal call positions in 3M and Johnson & Johnson.  The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2012, at 1:02 PM, iamlard wrote:

    Great strategy for retirement, and that's the one I'm following. I'd add some utilities too here, if any qualify as dividend champs or aristocrats.

  • Report this Comment On March 27, 2012, at 5:45 PM, jssiegel wrote:

    Great idea if you have the time to let dividend reinvestment compound for a long time - you will end up with a large yield to basis ratio. Not so good if you have cash you wish to invest for income. Disclosure: I did just that with JNJ.

  • Report this Comment On March 27, 2012, at 6:50 PM, JAXXJAGUAR wrote:

    You could replace just about any 2 of the stocks you have listed and replace them with KO and MCD. In the long run, you will come out much better.

  • Report this Comment On March 27, 2012, at 9:21 PM, jdwelch62 wrote:

    I'd've included INTC on this list. It hasn't been around as long, and it hasn't raised dividends *every* year long enough to be an Aristocrate, but the dividend is higher than some of the companies on this list, and aside from CVX its P/E is remarkably low...

    ...but then again, I'm an admitted INTC fan!


  • Report this Comment On March 28, 2012, at 1:13 AM, iamlard wrote:

    I like INTC too, and it's a good piece of my portfolio, but I liked it a lot more when the P/E was 10!

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