According to Bankrate, the average interest rate on a checking account these days -- for those that pay interest -- is less than 0.5%. A 10-year U.S. Treasury bond will pay out 2.3%, while the average stock on the S&P 500 is paying even less than that -- not even 2.1%. How is a Fool supposed to retire on such meager yields?
The good news is that you don't have to. While the average stock may pay only 2.1%, many dividend stocks are much more suitable for financing a comfortable retirement. To help you find them, we've asked three of our investors to offer up their favorite dividend stock ideas for retirement. They picked AT&T (NYSE:T), Johnson & Johnson (NYSE:JNJ), and Kohl's (NYSE:KSS).
A favorite Dividend Aristocrat
Leo Sun (AT&T): AT&T has raised its dividend annually for over three decades, making it an elite Dividend Aristocrat that has raised its payout for over 25 years. AT&T is the second largest wireless carrier in the U.S., the biggest wireline services provider, and the top pay-TV provider -- thanks to its acquisition of DIRECTV. If its proposed acquisition of Time Warner is approved, it will also become one of the world's biggest media companies.
That massive moat makes AT&T a rock-solid income investment for retirees. AT&T currently pays a forward dividend yield of 5.4%. Over the past 12 months, it spent 91% of its earnings and 75% of its free cash flow on those payments, so it has room to keep raising its dividend. The stock is also fairly cheap at 19 times earnings, compared with the industry average of 22 for telecom companies.
AT&T faces some near-term headwinds. Its wireless subscriber growth remains sluggish, and its wireline growth continues to decline. But AT&T is offsetting those top-line declines with smart cost-cutting strategies and buybacks, and the future bundling potential of its wireless, pay-TV, and Time Warner ecosystems could reduce costs and boost its user growth.
Analysts expect AT&T's revenue to dip 2% this year but for its earnings to grow 3%. Those growth figures seem dull, but AT&T's steady growth, reasonable valuation, and hefty dividend should serve retirees well.
Solid as a rock
George Budwell (Johnson & Johnson): Diversified healthcare giant Johnson & Johnson is arguably a must-own stock for retirees looking for stable sources of passive income. Besides raising its dividend every year for over five decades and earning a spot among the elite Dividend Aristocrat group as a result, J&J is a proven leader in the realm of pharmaceutical innovation.
That's a key trait in the highly competitive pharma space. The entrance of novel copycat drugs known as biosimilars into the U.S. market and the ongoing price erosion for many branded medicines because of payer push back are forcing companies to rely more and more on rising sales volumes to drive growth.
J&J, for its part, is adapting to this shifting landscape by continuing to invest in high-impact new medicines in oncology, inflammatory conditions, metabolic disorders, and cardiovascular diseases, to name a few. Not long ago, for instance, the drugmaker doled out a whopping $30 billion to gain access to Actelion's portfolio of pulmonary arterial hypertension (PAH) medicines.
The point is that its newly acquired PAH franchise, combined with emerging new stars such as multiple myeloma drug Darzalex, should provide a robust firewall against the growing biosimilar threat and the never-ending battle with payers over prices.
So even though J&J's present yield of 2.5% is slightly below average for a major drug manufacturer, the company's well-diversified product portfolio, and reasonable payout ratio of 55%, suggest that this stock should be a healthy source of passive income for the foreseeable future.
Back to school, and back to big dividends
Rich Smith (Kohl's Corporation): Summer is nearly half over, and parents are beginning to shop for school supplies -- a trend that couldn't come soon enough for Kohl's, which has announced an intention to steal market share from its retail rivals in the back-to-school market.
Due largely to Amazon.com's dominance of e-commerce, and also to its recent moves into apparel, and even brick-and-mortar retailing, Kohl's -- a brick-and-mortar retailer itself -- is not exactly in favor right now. Since the start of this year, Kohl's stock has lost 17% of its value as the online retail behemoth stepped up its assault. Yet Kohl's has kept its dividend intact throughout the attack and even raised its dividend last quarter. As the stock price has plummeted while the dividend held constant, the dividend yield has swelled to a whopping 5.3% -- more than twice the average payout on the S&P 500 -- even as its P/E ratio got cheaper. And with Kohl's currently employing only about 60% of its total profits to fund its dividend, you can rest assured that it has the wherewithal to keep paying that dividend -- as if its recent decision to hike the dividend wasn't already proof enough.
Today, you can buy a share of Kohl's stock for less than 12 times earnings. Analysts predict these earnings will grow at 8% annually over the next five years. Plus, Kohl's will pay you a 5.3% dividend to own the stock, which raises the total return on the stock to an anticipated 13.3% and gives Kohl's stock a total return ratio (analogous to a PEG) of just 0.9.
Between the cheap price and the outrageously large dividend -- a dividend we know Kohl's can afford to pay -- I think now is a fine time to invest in Kohl's stock for retirement.