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3 Dividend Stocks That Are Perfect for Retirement

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These household names will produce ample cash for your retirement portfolio.

Every retiree's stock portfolio needs a few high-quality dividend stocks. That means looking beyond the plain dividend yields to consider factors such as payout growth, cash-backed dividend policies, and a high-quality business that will support generous dividend payments for many years to come.

In search of exactly that kind of all-round cash machine, we asked a handful of your fellow investors here at The Motley Fool to share their best postretirement income stock ideas. Read on to see how they came up with International Business Machines (IBM -3.53%), NextEra Energy Partners (NEP 1.19%), and Johnson & Johnson (JNJ -1.09%).

Three piles of gold coins, resting on a spiral-bound calendar

Image source: Getty Images.

An energy dividend you can count on

Travis Hoium (NextEra Energy Partners): Investing in retirement should not require a lot of risk-taking or thought. That's why I think NextEra Energy Partners is a perfect stock for retirees.

NextEra Energy Partners is a yieldco, a company that owns renewable energy assets that pay dividends from the ongoing cash flow generated by the assets. It owns 3.7 gigawatts of wind and solar assets with contracts to sell energy to utilities for, on average, the next 18 years. That ensures cash flow that will fund the existing dividend yield of 3.8% for nearly two decades, but there are growth opportunities as well.

Yieldcos buy new renewable energy assets either by using excess cash from operations or through issuing new debt and equity. In the latter case, having a low dividend means a yieldco's cost of capital is low, and projects acquired will be accretive to the dividend. NextEra Energy Partners' 3.8% yield is low by yieldco standards, and that makes it easy to buy projects and grow the dividend long-term.

Management has already said it will be able to grow the dividend 12% to 15% through 2022, which means it will rise to as high as $3.26 per share -- a 7.8% yield at today's stock price -- by the end of 2020. If a stable, growing dividend is what you're looking for in retirement, this is the perfect stock for you.

Big Blue won't let you down

Anders Bylund (IBM): Big Blue has been around for more than a century, and is setting itself up for several more decades of serious business. And I don't think you'll find a company more committed to the idea of direct shareholder cash returns than IBM.

The dividend payouts have seen uninterrupted increases since 1995, creating an unbroken 22-year streak of annual boosts. The payout per share has grown a heart-stopping 1,400% larger in the last 20 years. Over the same period, IBM spent more than $115 billion on share buybacks -- another method of shoveling cash flows directly into investors' pockets.

Those cash contributions are making a big difference for IBM's shareholders. Over the last two decades, IBM's market cap has grown just 48% larger. But thanks to the generous buybacks, stockholders saw share prices triple. And if you reinvested the dividends into more IBM stock along the way, you'd have a 320% return instead -- more than quadrupling your money:

IBM Chart

IBM data by YCharts.

The buybacks and dividend increases keep coming through thick and thin. Big Blue has been known to take on more debt in order to finance these policies when cash flows run low. That's not an issue today, since IBM's trailing free cash flows stand at $11 billion. In the last four quarters, 30% of that cash went to share buybacks, while 50% was earmarked for dividend checks.

All told, IBM's dividend yield has soared to 3.7% recently, a level not seen since the mid-1990s (and even then, only temporarily).

This is the kind of ironclad dividend policy you want to see when collecting income from your retirement nest egg. On top of that, IBM is a just-plain-good investment right now, set to increase in value after a few lean years. Might as well lock in those juicy yields while share prices are low.

A bulletproof healthcare stock

Jeremy Bowman (Johnson & Johnson): Retirees want safety and security in their investments, and when I think of a stock that will deliver in any kind of market environment, I think of Johnson & Johnson. The diversified healthcare giant has been around since 1886, and since it operates in the healthcare sector, it isn't subject to the whims of the cyclical economy -- people get sick no matter what the unemployment rate is.

Though the company does compete in pharmaceuticals, it also makes medical devices and consumer products like Tylenol and Band-Aids, so it's not as sensitive to the "patent cliff" that can make pure-play pharma companies like Pfizer or Merck risky.

J&J is one of only two companies (Microsoft is the other) with the highest AAA credit rating from Standard & Poor's, another testament to its rock-solid balance sheet. As a dividend payer, the conglomerate is no slouch either. Johnson & Johnson is a Dividend Aristocrat, having hiked its dividend payout for a whopping 55 years in a row.

Today, it offers a dividend yield of 2.4%, and a modest payout ratio of 46%, meaning it has plenty of room to continue raising its dividends. The company has lifted the payout by 5% or more for at least the last 25 years, and is due for another hike in the coming months.

Considering the projected growth in the health sector as baby boomers reach retirement age, the company's strength in medical devices, and the stock's defensive position as a dividend-paying healthcare specialist, Johnson & Johnson should continue to be a rewarding dividend stock for retirees to own.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$133.48 (-3.53%) $-4.89
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$176.88 (-1.09%) $-1.95
NextEra Energy Partners Stock Quote
NextEra Energy Partners
NEP
$66.46 (1.19%) $0.78

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

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