Retiring Soon? Here Are 3 Stellar Dividend Picks

Retiring in the next 10 years?

Chances are, your portfolio probably isn't anywhere close to where it should be. Instead of pressing the panic button (like most folks), read ahead and I'll explain how you should take a few careful steps to get back on track.

The simple but unfortunate truth
In a recent Wells Fargo survey, respondents ages 50-59 said they had saved, on average, about $29,000. If you plan on retiring when you're 65, or even close to that age, $29,000 simply isn't going to cut it. With Social Security remaining stagnant and the target of proposed cuts, pensions all but gone, and medical costs rising, baby boomers near retirement age face some daunting obstacles.

Near-retirees frequently make one of two major mistakes. The first group figures that because they don't have enough money saved, they need to make up for lost time by pouring all their savings into equities in the hopes of finding outstanding gains to cover their shortfall. The second group fears losing any of the money they've worked so hard to make, and so instead of investing, they simply keep all of their money out of the market. In fact, a recent Fidelity study showed that 28% of participants (ages 55 and above) had either no money in stocks or 100% of their 401(k) balances in the stock market.

This is a pretty understandable response; folks have a tendency to either want to "risk it all" or to avoid further losses at all costs. Both tactics could be fatal for your portfolio.

What you shouldn't be doing
If you are close to retirement, you can't afford to have all of your money in the market -- just ask anyone who has dealt with the past decade of near-zero returns. However, this doesn't mean you should jump into the market head-first and start picking growth stocks that you hope will bring unusually high returns.

For instance, I own shares of First Solar (Nasdaq: FSLR  ) , one of the largest providers of thin-film solar panels. As a leader in the industry with a great competitive advantage, this is a terrific stock for someone like myself who has plenty of years until retirement. However, subsidy cuts in Europe and uncertain regulation could mean that this stock needs years until it reaches its potential, so I wouldn't suggest it for a near-retiree. The same goes for a stock like Sirius XM (Nasdaq: SIRI  ) -- a terrific turnaround story that has seen its share price rebound by more than 1,200% since early 2009. However, with continuing competition and a beta of 2.19, this stock is not for the faint of heart; near-retirees want to be able to sleep at night, not toss and turn worrying about fluctuating prices.

So what next?
As I've suggested in the past, folks with a portfolio shortfall should look toward dividend stocks to help them get back in the game. Allocate maybe 20% of your portfolio, enough to make a difference but not enough to scare you out of the market, to solid, dividend-paying stocks that have room for growth.

Dividend investing has gotten quite a bit of attention lately as investors turn to companies instead of savings accounts or Treasuries for some extra income. But you can't simply just look for the highest yields, as that can be a recipe for disaster.

As an example, look at both Frontier Communications (NYSE: FTR  ) and Windstream (NYSE: WIN  ) , companies that pay a more-than-generous 7% dividend. Although their dividends seem great, their payout ratios are dangerously high, which suggests they may have to cut their payouts in the future. Although things look better on a free cash flow basis, cash flow is subject to acquisition integration risks and customer churn. Growth for the two rural telecoms is expected to be minimal -- if not negative. What you want from a dividend stock is a great dividend, sustainability, and room for capital appreciation as well. These two companies don't seem to offer those three traits.

At the Fool, we often talk about the Dividend Aristocrats -- companies that the S&P tracks that have been able to increase their dividends for 25 consecutive years or more. These companies have shown that they can endure the booms and busts that are inevitable, and we've certainly experienced our fair share in the past 10 years. So I searched the list of 42 current aristocrats and screened them for high dividends, reasonable payout ratios, and five-year growth estimates at or above 10%. These are the three stellar dividend stocks that can help you get started investing again:

Company

Dividend Yield

Payout Ratio

5-Year Growth Estimate

Cincinnati Financial (Nasdaq: CINF  ) 5.0% 52% 10.0%
Leggett & Platt (NYSE: LEG  ) 4.7% 90% 15.6%
Abbot Labs (NYSE: ABT  ) 3.6% 55% 10.1%

Source: Capital IQ, a division of Standard & Poor's.

Retire in style
It's important to drill down further into these companies to see if you're comfortable with each of them, but for the most part, they've all shown resilience and the ability to continue paying shareholders, even when times were tough -- and that's the sort of stock you want to own.

Just because you don't have enough money to retire today doesn't mean you can't retire comfortably in the next 10 or 15 years. Be smart about asset allocation; don't sit scared on the sidelines, but don't hastily decide to go "all in" to see if you can find the next Google or Microsoft.

Investing a small amount of your portfolio in dividend-paying stocks is a great way to start working on your retirement in 2011. You can learn more useful tips by clicking here to read our brand new special report, The 7 Secrets to Salvage Your Retirement Today.

Jordan DiPietro owns shares of First Solar. Google and Microsoft are Motley Fool Inside Value recommendations. First Solar and Google are Motley Fool Rule Breakers choices. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google and Microsoft. Motley Fool Alpha owns shares of Abbott Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (66)

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 January 06, 2011, at 5:48 PM, nomoneyinthebank wrote:

    Maybe Siri can become a Google in 5 or 10 years???

  • Report this Comment On January 06, 2011, at 6:58 PM, rpgizzle wrote:

    FSLR is a bad investment. Any company/industry that relies on gov't subsidies to survive has a serious flaw in its business model.

  • Report this Comment On January 06, 2011, at 7:01 PM, DrRonPaul4Prez wrote:

    I liked this article, honestly, but I'm confused as to how one of the stocks you cited as a good choice has a 90% payout ratio, after you mentioned "dangerously high" payout ratios for other stocks.

  • Report this Comment On January 06, 2011, at 9:35 PM, Lisbet565 wrote:

    Why aren't MLPs (such as ERF), with their superior yields AND meaningful appreciation potential, ever discussed ? They have long been a part of our retirement portfolio and, with the proper diligence, continue to reward us handsomely.

  • Report this Comment On January 06, 2011, at 11:37 PM, cdenny6 wrote:

    It seems like MF got contaminated with crap. Thought you guys have a filter on these kind of things.

  • Report this Comment On January 07, 2011, at 5:02 AM, wbwof wrote:

    Motley has a virus of sorts.....on several articles I have gone on to check the comments and this is here instead. If you have a filter please check it because some of these dust mites are getting through. I really enjoy hearing other folks insights and opinions. These truly give a balance to the articles and I hope as many others that you have the means to clear these "mites" from your comment section...Best of luck!

  • Report this Comment On January 07, 2011, at 8:56 AM, TMFPhillyDot wrote:

    @DrRonPaul4Prez ,

    That is a totally valid point. In this instance, when I saw that LEG had a high payout ratio, I then went to the next metric that is often highly valuable when identifying safe dividends -- the FCF coverage. Anything above 1.2 is typically a good number, and in this case LEG has a ratio of 1.8 so I felt comfortable recommending it.

    Hope that helps,

    Jordan (TMFPhillyDot)

  • Report this Comment On January 07, 2011, at 9:50 AM, pete163 wrote:

    Ok it's time to start to load up with some more Sirius XM stock, the price is on the money !

  • Report this Comment On January 07, 2011, at 3:43 PM, mikecart1 wrote:

    90% Payout ratio is good in this article and bad in another. Thank goodness the writer's aren't prescribing medicine to patients lol.

  • Report this Comment On January 09, 2011, at 1:10 PM, borntobebad wrote:

    Siri Xm is a great stock to buy...It's going to hit above 2 soon...most analysts on Fidelity gave it a buy...included S&P....Thompson Reuter....

  • Report this Comment On January 14, 2011, at 11:57 AM, KJCC wrote:

    Just added to my FSLR position...read what they are about to do in China.

  • Report this Comment On January 14, 2011, at 4:02 PM, legrave wrote:

    While the ability to have paid and increased dividends over 25 years is something to be commended for, I have a hard time understand , how in the healthcare sector, where patent life and third party payers are driving the future returns, past performance would be predictive of future performance ?

  • Report this Comment On January 17, 2011, at 10:17 AM, MotleyRhino wrote:

    Greetings Fellow Fools,

    This is my first post here. Most forums of this nature reflect a lot of ignorance pooling. The good news is the foolish ones usually make sense.

    Good on everyone.

    Motley Rhino

  • Report this Comment On January 24, 2011, at 7:33 PM, DYCRIL wrote:

    iF A STOCK DOES NOT PAY DIVIDENDS, MOVE ON AND A GOOD PLACE TO MORE TO ARE

    MLPS......DYCRIL DUNN

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