If you're near or in retirement, owning dividend stocks can be a great way to create a consistent stream of cash flows to fund your living expenses or even travel the world. But not all dividends are created equal.
We asked three of our investors for their favorite dividend stocks for people in retirement, and their top picks were Hormel Foods Corp. (NYSE:HRL), Wal-Mart Stores, Inc. (NYSE:WMT), and NRG Yield, Inc. (NYSE:CWEN) (NYSE:CWEN-A). Here's why these will be stable dividend stocks for many years to come.
A legacy food maker is here to stay
Jeremy Bowman (Hormel Foods): Hormel Foods may be best known for Spam and other canned foods like chili, but the company is reinventing itself for the 21st century and continues to be a reliable dividend payer. For retirees, this is the kind of defensive, income investment worth considering.
Hormel currently offers a 2.2% dividend yield, slightly better than the S&P 500, and the company is a Dividend Aristocrat, having raised its quarterly payout every year for 51 years in a row.
The company has also done a better job than others at reorienting its portfolio to changing food tastes, by acquiring brands like Justin's, which makes a range of organic nut butter; Applegate, a line of organic deli meats and cheeses; and the Muscle Milk brand of protein drinks. Hormel's products have historically focused on proteins, which should benefit the company as higher-protein diets like paleo and low-carb have gained popularity.
This business model works
Demitri Kalogeropoulos (Wal-Mart Stores): Consistent operating strength is critical to the success of a dividend stock investment. That's why I'm highlighting Wal-Mart as a good choice for retirees today. After all, few retailing trends have stood the test of time better than price leadership, this business's core competitive advantage.
Wal-Mart is just emerging from a weak operating stretch that saw sales decline as rivals picked away at its market share. Yet growth is back and even accelerating, today. In August the company posted its 12th consecutive quarter of positive comparable-store sales gains as customer traffic ticked higher.
Hefty investments in the labor force are helping improve the shopping experience. Wal-Mart is also pursuing a uniquely aggressive approach to the online sales channel that's producing solid results. E-commerce spiked 60% in the most recent quarter and was responsible for a significant portion of overall comps growth.
These initiatives require major capital outlays, which helps explain why operating income still hasn't recovered from the $27 billion peak it reached in 2013. However, that spending also serves as a big barrier to competitors hoping to duplicate Wal-Mart's successes.
Income investors can rest easy knowing that their dividend is well covered by the kind of booming cash flow that's a consequence of this retailer's dominant hold on the industry. Meanwhile, they can take advantage of pessimism about the physical retailing business that has kept Wal-Mart's yield (now 2.5%) significantly above that of the broader market.
A high yield will pay you long into retirement
Travis Hoium (NRG Yield): If you're looking for a great dividend stock, then look no further than an energy yieldco like NRG Yield. The company owns wind, solar, and a small number of fossil-fuel assets, and sells energy to utilities through long-term power purchase agreements. For NRG Yield, owning these projects is like owning a bond with predictable cash flows for an average of 16 years, the average contract life of the company's assets. But instead of the low yield from a bond, the dividend is a whopping 6.1%.
NRG Yield's parent company NRG Energy is also looking to sell the yieldco, which could be good for its operations long-term. A new parent company with a pipeline of renewable energy projects could allow the yieldco to issue new shares and debt, to grow the business and the dividend.
Owning a yieldco stock like NRG Yield won't drive massive gains in your portfolio, but it will generate consistent dividends for decades to come. And if you're looking for energy stocks that won't be affected by wild swings in oil or natural gas prices, renewable energy -- and yieldcos in particular -- should be at the top of your list.