Retirement income comes from three places -- 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 an investor to do?
Swelling liabilities, expanding lifespans
Sixty years ago, many folks retired with a congratulatory pat on the back, a gold watch, and a guaranteed monthly paycheck. Those days are over, as unfunded pension liabilities are mounting. The nation's largest pension fund, the $230 billion California Public Employees' Retirement System, or CalPERS, is one such example. A 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. In 2007, that figure jumped to age 75. In 2020, life expectancy is projected to be nearly 78 years for males and 83 years for females. With several decades in retirement, inflation is an investor's worst enemy.
Dividends are crucially important to helping you beat inflation by allowing you to pay for groceries, gas, and health care at future prices (and who knows what those will be?). If you need more incentive to ponder dividend payers, consider this. From 1999 to 2010, the median return on stocks with a market cap above $1 billion was negative 3.2%. Stocks with the same market cap that paid at least a 3% dividend yield saw a 28% cumulative return -- even before considering dividend payments!
Dividends act as shock absorbers for your portfolio during flat markets. They also help you bring home more bacon.
5 solid dividend stock ideas
I've compiled a list of five dividend-paying companies based on the following criteria:
- Attractive industries: Potential rivals have a tough time breaking into these companies' line of work.
- Strong competitive position: Brand dominance or special niches help these tenacious companies sustain long-term profitability.
- Solid financial position: Robust balance sheets characterize these companies.
- Dividends: These companies pay greater than 2.5% yield.
Five income-generating stocks that fit these criteria to a T are listed in the chart below.
|
Company |
Dividend Yield |
5-Year Average Dividend Yield |
Number of Years Paying a Dividend |
|---|---|---|---|
|
France Telecom
|
12.6% | 5.9% | 14 |
|
AFP Provida
|
9.6% | 4.4% | 17 |
|
Veolia Environnement
|
5.9% | 6.3% | 10 |
|
Guess?
|
2.7% | 1.8% | 5 |
|
StoneMor Partners
|
9.0% | 11.6% | 7 |
Sources: Yahoo! Finance, Dividata.
Of course, companies can increase, decrease, or suspend their dividends at any time.
France Telecom
If you're willing to brave foreign markets, you can pick up this European stock with a mouthwatering dividend and an attractive valuation. This integrated telecom service provider has a huge but saturated presence in Europe. However, France Telecom's "Orange" business segment has reported that its 16 mobile subsidiaries in sub-Saharan Africa reached more than 33 million subscribers at year-end 2011, a 25% increase compared to 2010. France Telecom boasts a forward P/E of seven and price-to-book of just under one. The stock is down nearly 18% this year.
AFP Provida
Chile privatized its Social Security system in 1980 and since that time has mandated that Chilean workers deposit 10% of their pay into accounts on which they can draw for retirement. AFP Provida is the largest company authorized by the government of Chile to provide privatized pension services, giving the company a vast regulatory moat. Provida makes most of its revenue from monthly fees on deposits, and the company boasts a 52% net margin.
Veolia Environnement
French utility company Veolia Environnement's blockbuster dividend yield in the 6% range makes this stock attractive. Veolia recently announced it plans to divest most of its regulated water unit in the U.K. in an effort to scale back the number of countries in which it operates and cut its debt to below 12 billion euros by the end of 2013. Lower debt levels will likely yield more free cash flow, allowing Veolia wiggle room to possibly increase its already-generous dividend.
Guess?
Recently recommended by Motley Fool Income Investor advisor James Early, leading apparel brand Guess? is geographically diversified, with stores in more than 80 countries. Guess? licenses its brand to makers of accessories, shoes, and fragrances -- a very profitable segment for the company. Guess? boasts nearly $500 million in cash and virtually no debt. The company trades at a forward price-to-earnings ratio of roughly 10, and insiders hold an impressive 31% of outstanding shares.
StoneMor Partners
The second-largest cemetery owner and operator in the U.S. and the only publically traded cemetery structured as a master limited partnership, StoneMor Partners yields an otherworldly 9%. MLPs are partnerships that trade like stocks and pass their income directly to shareholders. Cemetery companies buy acres of land in which customers inevitably repose indefinitely. Real estate acquisitions represent a huge cost for cemetery businesses and, therefore, a strong case for an MLP structure. Last month, StoneMor announced its plans to acquire the largest family-owned and -operated funeral business in Florida.
If I had to put my money in just one of these stocks, I'd choose AFP Provida. I love its regulatory moat, recurring-revenue business model, great dividend yield, and strong dividend-paying history.
If you're looking for more income-generating stocks, check out our free report. It's filled with nine rock-solid dividend stocks, including one medical equipment company that boasts not only a 98% customer satisfaction rating, but also has doubled its dividend payout since 2006. You don't want out miss out on this one. The report won't be available forever -- get your free copy today.
