Stocks That Pay You Back

What will you use to generate income in retirement?

Many investors think that low-risk fixed-income products such as Treasury bonds and CDs will do the trick. But as retirees have learned in the past few years, these products may not be enough. Right now, the yield on the 10-year Treasury is below 3% -- generating a paltry $300 per year for each $10,000 invested.

That's simply not enough to live on today, let alone 10 or 20 years down the road.

So what's an investor to do?

Get started now
At first glance, large dividend-paying stocks with single-digit growth rates don't seem all that attractive, especially with stocks like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) cutting dividends and losing share price recently. But large dividend-paying stocks just might end up being your best friends when retirement finally rolls around.

The catch is that to maximize the utility of dividend-paying stocks, you should purchase them well before you actually need the income. The longer you hold a dividend payer, the bigger your dividends tend to get.

For example, an investor who picked up $10,000 worth of Altria (NYSE: MO  ) in January 1970 initially acquired 277 shares, a stake that would have started by paying out a mere $69 per quarter at the time.

That wasn't much then, but after 39 years of stock splits, our hypothetical investor now has 26,592 shares of Altria, the same number of shares in its Philip Morris International (NYSE: PM  ) spinoff, and 18,402 shares of its Kraft spinoff -- altogether worth more than $1.85 million today. Perhaps, more importantly, our investor would be receiving over $110,000 each year in dividends. (It should also be noted that these figures would be even larger if the investor had reinvested dividends over the years.)

It's hard to believe, but this one stock alone could have funded your retirement.

Staring you in the face
While Altria is an incredible example, investors in other stalwarts have seen similar (albeit somewhat less spectacular) successes over the same time period:

Company

No. of Shares,
January 1970*

No. of Shares,
February 2009

Current Value
of Shares

Annual
Dividends**

United Technologies (NYSE: UTX  )

248

7,936

$393,784

$12,221

Boeing (NYSE: BA  )

336

10,206

$436,817

$17,146

Disney (NYSE: DIS  )

75

14,400

$280,080

$5,040

*$10,000 invested on Jan. 2, 1970. **Based on estimated annual dividends per share, according to Yahoo! Finance.

Remarkably, the companies listed in the table above were already established names in 1970. You didn't have to dig around to find them or take a flier on a hot new technology. These companies were simply doing what they had done for decades -- growing steadily and rewarding shareholders.

Foolish bottom line
So, what are the best stocks to generate income for your retirement? The simple answer: stocks that pay you back.

But all dividends aren't created equal. That's why Fool advisor James Early and the Motley Fool Income Investor team look for businesses with strong track records that are set up nicely for future growth. If you want to see the rest of the Income Investor recommendations, follow this link for a free 30-day trial of the service.

Time is the only thing stopping you from reaping the rewards of dividend stocks for years to come, so get started now!

Dan Caplinger updated this article, originally written by Todd Wenning and published on Dec. 22, 2006. Dan owns shares of Altria and Philip Morris International. Walt Disney is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. Kraft Foods is a current Motley Fool Income Investor recommendation, and Bank of America is a former one. The Fool's disclosure policy pays dividends every day.


Read/Post Comments (3) | Recommend This Article (10)

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 February 10, 2009, at 1:58 PM, pondee619 wrote:

    Could you please explain to me where I, a fifteen year old high school student in 1970, was going to get $30,000.00 to invest in three stocks?

    http://www.1970sflashback.com/1970/Economy.asp

    The cost of a NEW HOME was $26/27K.

    Median Household Income: $8,734.00

    While I appreciate the point, invest and get rich, let's try to keep it real. If you had enough spare money in 1970 to buy a second house you would be rich today. Duh!

  • Report this Comment On February 11, 2009, at 3:16 AM, suzylucy wrote:

    I think you missed something here Mr. Duh!:

    the article is merely showing that MO was not unique in it's ability to net you a tidy profit from a $10,000 investment. And while $10,000 was a lot of money in the 70's (I was alive back then too), having that amount to invest was not too uncommon for the times. The savings ethic was much stronger than it is today, even in the presence of the guaranteed pensions most workers expected and later received.

    I found the article to be quite REAL and very interesting. Has anyone else noticed how cranky people seem to be lately?

  • Report this Comment On February 11, 2009, at 8:09 AM, pondee619 wrote:

    NO, I got the point, invest for the long term and do well. 10 K was a very uncommon amount to plunk down on one issue. The average car cost 3,708. http://www1.eere.energy.gov/vehiclesandfuels/facts/2008_fotw... A new car was a big deal. Today's dollars 19,266. That $10K investment today is $52,000.How many 20 to 30 year olds have that kind of money today for that kind of an investment?

    Now an article that told you what a $100 monthly investment over the course of 39 years would bring a touch of reality into play.

    Asking a 30 year old family person to plunk down one third of the price of a home, or 1 years worth of gross income, that is a bit unrealistic. Makes dynamic effect in a story.

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