Dividend stocks are popular with investors at or near retirement since they pair above-average yields with a decent chance at capital appreciation. But which dividend payers make the best investments?
An industrial dividend built to last
Travis Hoium (3M): Your golden years should be spent worrying about what to have for lunch or which cookie to take during coffee hour, not worrying about your investments. And today there are few companies that we can reasonably say stand little chance of being disrupted in a big way in coming decades.
3M is one company that I think has enough product and geographic diversity to withstand all kinds of technology advances and innovations we'll see in coming years. The company has major businesses in everything from consumer goods to healthcare to displays (like the smartphone or computer you're reading this article on). It's not the kind of business that will give investors a lot of growth, but it generates consistent revenue and cash flow.
This cash flow is important because the biggest reason to own 3M stock for the long term is the dividend. Currently yielding 2.3%, 3M has paid a dividend for over 100 years and increased its annual dividend 59 straight years. If you're looking to breathe easy in your golden years and collect a consistent quarterly dividend check, this is a stock you should own.
Brush up on your dividends
Demitri Kalogeropoulos (Colgate): Responsible for 44% of global toothpaste sales and one-third of the toothbrush market, Colgate is the dominant force in its consumer products niche. That unique positioning confers a few big benefits to this business, including market-thumping profitability and a revenue base that tends to hold up well even during recessions.
Colgate's business is facing headwinds right now. After organic revenue jumped 4% in 2016, the metric is running flat today and management is predicting weak gains for the full year due to an industry slowdown in the U.S. and Europe.
Yet there's no reason for retirees to fear an income cut any time soon. This Dividend Aristocrat has generated $1.7 billion of profit in the first half of the year, or roughly the same level as in the prior-year period. Free cash flow, meanwhile, has been a hefty $1.1 billion, which provided ample room for Colgate to pay out its $700 million semiannual dividend commitment.
Those strong finances help explain why the stock has done so well recently despite decelerating sales growth. Unfortunately, it also means retirees won't be getting a screaming bargain with a Colgate purchase. But they will own a steady business that delivers consistently rising income during booms and busts.
A retailer yielding over 4%
Jeremy Bowman (Target): A retail stock may seem like a strange recommendation these days for retirees, who seek safety, but the headwinds against retailers have created some dividend bargains. Target is one of them.
The big-box chain now offers a 4.5% dividend yield as the stock has pulled back over the last two years, and the company is shifting strategy to meet the challenges that have risen over that time.
Unlike department store chains, which seem to have the least protection against e-commerce based on a model made for the 20th century, Target has a unique brand that is not easily replaced. The company has mastered the "cheap chic" style that separates it from competitors like Wal-Mart and other home goods and apparel chains.
Target has also become more aggressive in recent months, saying it would cut prices to be competitive, much like Wal-Mart successfully did in 2015. The stock plunged on that news, but Target's performance is already turning around, as the company this week showed off comparable-sales growth for the first time in a year. Target raised its guidance for the year in July and showed off a 32% increase in digital sales for its fiscal second quarter.
The retailer is also a Dividend Aristocrat, having raised its dividend every year for 45 consecutive years, and the company has a payout ratio of just around 50%, so it should be able to continue funding dividend increases even if earnings growth stalls. After the recent earnings report, Target's stock and dividend look safe.