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2 Stocks to Add to Your Social Security Income

By Matthew Frankel, CFP® – Jul 21, 2016 at 12:47PM

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Here are two stocks with rock-solid dividends and the potential to grow.

Image source: Getty Images.

After you retire, Social Security is not likely to be enough all by itself. You'll need other sources of income to maintain the lifestyle you want, and the best place to get income is from your retirement investments. With that in mind, here are two high-dividend stocks, both REITs with long-term growth potential, that could give your retirement income the boost it needs.

Monthly dividend checks -- just like Social Security

One problem income-seeking investors have is that the vast majority of dividend stocks make quarterly payments. Monthly payments can make it much easier to budget for expenses -- after all, there's a reason Social Security sends you a check every month, not every three months.

Realty Income (O 1.37%) is a smart choice for income-seekers who want monthly checks, as well as for younger investors. The company's business model is simple: It mainly invests in freestanding retail properties with high-quality tenants that operate in recession- and competition-resistant businesses. Tenants sign long-term net leases, which not only means properties stay occupied for a long time, but the income stream continues to grow, no matter what the stock market or economy is doing.

As of this writing, Realty Income has more than 4,600 properties leased to 243 tenants in 47 different industries across 49 states, so income isn't too reliant on any one tenant. The portfolio is 97.8% occupied and has never dropped below 96%.

The results speak for themselves. Realty Income has paid 552 consecutive monthly dividends, and has increased the payout for 75 consecutive quarters at an annualized growth rate of 4.7%. And, since investors benefit from rising property values as well, the stock has averaged an outstanding 18.2% total return since its 1994 IPO, which is even more impressive when you consider two major market crashes have occurred since that time, including one directly tied to real estate. To put this in perspective, a $10,000 investment in Realty Income's IPO would be worth about $396,000 today, and it would be generating more than $13,450 in annual dividend income.

Image source: Realty Income investor presentation. 

Rent is rising -- here's how to play it

With homeownership rates hovering near generational lows, it makes sense to invest in REITs that own apartments. Specifically, it's a smart idea to invest in a company that develops the best apartments in the best markets, like AvalonBay (AVB 0.65%) does.

AvalonBay's portfolio consists of 282 apartment communities with more than 83,000 individual apartment homes, located in desirable (read: high-rent) markets along both coasts. These markets have higher barriers to homeownership, lower-than-average new apartment completions, strong job growth, and high household incomes, making them ideal places to own rental properties.

A cornerstone of AvalonBay's growth strategy is development. Instead of acquiring existing buildings, the company prefers to build them from the ground up, an added creator of value. According to the company, AvalonBay consistently realizes a profit margin of more than 30% on its completed developments, based on the income they generate relative to the building cost. As I write this, AvalonBay has $2.7 billion in projects under construction, and another $3.7 billion in the pipeline.

Finally, one of my favorite things about AvalonBay is its balance sheet. Just 20% of its capitalization is in the form of debt, and the company has an exceptional 7.2 times interest coverage. Not only does this make AvalonBay less vulnerable to downturns, but it gives the company the financial flexibility to pursue attractive investment opportunities as they come up.

Image source: AvalonBay Investor Presentation. 

Over the past 10 years, AvalonBay's dividend has grown at an annualized 5.8% rate, and the company has delivered a 11.7% total return to shareholders.

Just a start

High-quality REITs are perhaps my overall favorite type of retirement stock for their high dividends, as well as the potential for long-term growth, and these two are excellent examples of both. These are just two of many REITs that could supplement your Social Security income in retirement, and my reasoning for liking these two can be applied to others in order to create a well-diversified income stream.

Matthew Frankel owns shares of Realty Income. The Motley Fool has no position in any of the stocks mentioned. 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.

Stocks Mentioned

Realty Income Stock Quote
Realty Income
$63.57 (1.37%) $0.86
AvalonBay Communities Stock Quote
AvalonBay Communities
$167.97 (0.65%) $1.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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