Few groups of investors are more interested in the dividends paid by companies than senior citizens. Depending on the income their investments produce, seniors seek out stocks that not only provide steady streams of income, but are also stable, sturdy businesses that can grow and support their payouts.
We asked three Motley Fool investors to identify a stock that would be perfect for a senior citizen's portfolio. They identified Omega Healthcare Investors (NYSE:OHI), Johnson & Johnson (NYSE:JNJ), and Altria (NYSE:MO) as businesses senior investors could rely on to deliver now and in the future.
A company serving the most senior of senior citizens
Keith Speights (Omega Healthcare Investors): Omega Healthcare Investors is a real estate investment trust (REIT) that focuses on senior living. The company's property portfolio consists largely of skilled nursing facilities, but Omega also has assisted-living facilities (ALFs), independent living facilities, and rehabilitation and acute-care facilities in the mix.
As a REIT, Omega Healthcare Investors must return at least 90% of its earnings to shareholders in the form of dividends. Currently, its dividend yield stands at 7.67%. That's a yield that older investors as well as many young investors would love.
But can Omega keep its dividends flowing at such a high level? Probably so. The company certainly has a good track record, with 19 consecutive quarters of dividend hikes. And though the REIT is actually spending more to fund its dividend program than it's making in earnings right now, Omega's funds from operations (or FFO, which consists of operating cash flow plus depreciation and a few other adjustments) is quite strong.
Also, Omega Healthcare Investors seems well positioned to grow its earnings and its FFO. The consensus among Wall Street analysts is that the company will increase annual earnings by an average of nearly 16% over the next five years.
A solid medical conglomerate
Brian Stoffel (Johnson & Johnson): Outside of REITs, to which I have a limited exposure, I struggle to find a better long-term dividend stock for senior citizens to hold than Johnson & Johnson.
Before getting to the payout, it's worth exploring how the company makes its money. The consumer goods division accounts for popular products like Band-Aids and Tylenol and is protected by very strong brand power; pharmaceuticals -- led by sales of arthritis treatment Remicade -- are shielded for a time by patents; and medical devices usually have high switching costs that keep customers coming back year after year.
Here's how each division has done over the past three years:
As you can see, this actually isn't very impressive: Sales have shrunk overall and in two of the three divisions. But that's the point: Despite this, the company has continued to pay its dividend with no problem.
Currently yielding 2.5%, management has only had to use 53% of its free cash flow to make the dividend payment over the past year. That means that it is both very safe and has lots of room for growth moving forward. While I don't hold shares in my own portfolio, I'm also decades away from retiring. If I were older, this would be a cornerstone of my portfolio.
A smoke-free future that pays
Rich Duprey (Altria): When the Food and Drug Administration released its road map for tobacco last week, shares of Altria and other cigarette companies plunged because the regulatory agency said it wants to reduce nicotine to non-addictive levels. Since the vast bulk of tobacco companies make their money and profits from the sale of cigarettes, they would obviously take a big hit. Altria's stock dropped 10% and British American Tobacco was down 7%.
The decline in Altria's stock makes it a perfect entry point for senior citizens and others because although it is the biggest cigarette maker in the U.S. and its Marlboro brand holds a huge share of the market, it is also going to be the beneficiary of Philip Morris International's (NYSE:PM) push into reduced-risk products.
Philip Morris has submitted to the FDA for approval an application to sell its iQOS heat-not-burn (HNB) electronic cigarette in the U.S. with a reduced-risk designation. Because the HNB technology eliminates almost all of the harmful toxins associated with burning tobacco, it is a safer alternative for both smokers and those who want to quit. Philip Morris has spent over $3 billion developing reduced-risk products, and the consumable portion of its iQOS device would be marketed under Altria's Marlboro brand.
If it ultimately grants Philip Morris the reduced-risk label, both Philip Morris and Altria would have a huge competitive advantage over their rivals. At less than nine times earnings and less than 19 times next year's estimates, Altria is trading at a discount to the market while its dividend of $2.44 per share currently yields 3.6% annually, giving those seeking income from their investments, particularly seniors, a healthy option for a long time to come.
Brian Stoffel has no position in any stocks mentioned. 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 Johnson & Johnson. The Motley Fool has a disclosure policy.