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3 Dividend Stocks That Are Perfect for Retirement

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Income investors who are living off the money their portfolios generate don't just want consistency -- they want steady payout growth. Lowe's, Johnson & Johnson, and Altria offer both.

If you're at the point in your investing life where you're adjusting your portfolio from higher-risk growth mode toward a safer asset allocation -- one designed to support you dependably through your retirement -- you'll probably appreciate low-volatility stocks that supply reliable, steadily rising streams of income.

We asked three Motley Fool investors to identify stocks that fit that bill, and they chose Lowe's (LOW 0.12%), Johnson & Johnson (JNJ -1.78%), and Altria (MO 0.71%). Read on to learn why.

Shopping in a big box store

Image source: Getty Images.

A strong dividend with a fair valuation

Brian Stoffel (Lowe's): Investors recently got spooked about the future of this home improvement retailer after Amazon (AMZN -1.65%) announced it would be partnering with Sears (SHLDQ) to sell some Kenmore-branded appliances.

While that could cut into some business at Lowe's, I still consider the chain to be largely Amazon-proof. People aren't going to order two-by-fours and large appliances over the Internet when they have the option of visiting a store and seeing for their own eyes what they're paying for. Given that Lowes is half of a national near-duopoly in home improvement -- along with Home Depot -- I think its stock is a perfect pick for retirees.

And when it comes to valuation and dividends, I find Lowe's to be the better bet of the two. Lowe's currently trades at just 14 times free cash flow, while Home Depot sports a P/FCF ratio of almost 20. Moreover, while Lowe's current 2.1% dividend yield slightly trails Home Depot's, Lowe's has only had to use 26% of its free cash flow over the past year to cover it. And management has gone on record to say it plans to continue upping its payout.

Scientists in a laboratory

Image source: Getty Images.

Big cash flow, little drama

Keith Speights (Johnson & Johnson): I'm not at the point of retirement yet. When I do retire, though, there are two major things I'll look for in a stock: solid cash flow and low volatility. The cash flow is important for a company to keep those nice dividend checks flowing. The low volatility will allow me to sleep well without worrying that the stock is likely to crash.

Johnson & Johnson is one of the best stocks around that meets both of these criteria. It's a bona fide cash cow, with free cash flow over the last 12 months of over $16 billion. This enables J&J to pay a nice dividend, which currently yields 2.54%. The healthcare giant also boasts an enviable track record of increasing its dividend -- it has done so for 54 years in a row.

That cash flow also allows Johnson & Johnson to invest for future growth. It plows nearly 12% of sales back into research and development. It has also been busy on the acquisition front, with buyouts this year of Abbott Labs' (ABT 0.24%) medical optics business and the purchase of Swiss drugmaker Actelion.

What about volatility? J&J's beta is 0.68. Beta compares a stock's movement to that of the overall market. Values below 1.0 reflect an asset that is less volatile than average. Based on its beta value, J&J is roughly a third less volatile than the broader market. That's good.

There's probably no such thing as the "perfect stock" for retirees. However, with its big cash flow and little drama, Johnson & Johnson might come close.

Philip Morris iQOS heat-not-burn device

Image source: Philip Morris International.

No smoke, but it can still be on fire

Rich Duprey (Altria): Cigarette smoking is a dying habit, but millions of people still light up every day, and Altria remains the biggest U.S. producer of cigarettes, generating billions of dollars in sales and profits every year. And, with U.S. marketing rights for the MarkTen electronic cigarettes developed by its offspring, Philip Morris International (PM 1.25%), as well as a collaborative agreement to market its new heat-not-burn (HNB) tobacco technology iQOS under the Marlboro brand, Altria can also cash in on Philip Morris' "smoke-free future."

Were it not for regulators in most countries, this is where the tobacco industry would be hurrying. Because heating tobacco doesn't produce the kind of toxic chemicals burning it does, it is a safer way for smokers to get the tobacco flavor and nicotine hit they crave. Yet regulatory authorities have erected hurdles that make the process of proving that to their satisfaction much more difficult to achieve, and they're attempting to regulate e-cigs in the same way as they now regulate traditional, combustible cigarettes.

However, Philip Morris has surmounted those barriers and submitted to the FDA an application to have its iQOS HNB e-cig designated as a "reduced risk" product. Should the agency sign off on the label, it will give the company a huge competitive advantage over its rivals. While the competition would likely enjoy something of a halo effect from the designation, it would be Philip Morris and Altria that gain directly from being able to say their product is safer.

Tobacco stocks have always been attractive for their dividends and yields, and Altria with a payout of $2.44 a year that currently yields 3.3% is no different. It has raised its dividend every year since it spun off Philip Morris, and made a special dividend payment to shareholders following Anheuser-Busch InBev's (BUD -1.13%) acquisition of SABMiller, in which it held a 10% stake. With its tobacco portfolio still throwing off cash, and with a stake in the new technology that could be smoking's future, Altria is a dividend stock retirees can be comfortable with.

Brian Stoffel owns shares of Amazon. Keith Speights has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Anheuser-Busch InBev NV, and Johnson & Johnson. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$167.63 (-1.78%) $-3.04
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$45.06 (0.71%) $0.32, Inc. Stock Quote, Inc.
$140.34 (-1.65%) $-2.35
Abbott Laboratories Stock Quote
Abbott Laboratories
$110.53 (0.24%) $0.26
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$99.36 (1.25%) $1.23
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$201.68 (0.12%) $0.25
Anheuser-Busch InBev SA/NV Stock Quote
Anheuser-Busch InBev SA/NV
$54.40 (-1.13%) $0.62
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$310.48 (-0.35%) $-1.10

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

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