After switching gears into retirement mode, investors need to take a more defensive posture. Dividend-paying stocks tick some important boxes, but how do you choose ones that will keep paying you year after year without fail?
We asked three Foolish investors to highlight stocks they think are perfect for retirees. Here's why they think Wal-Mart Stores Inc. (WMT 0.96%), Cisco Systems, Inc. (CSCO 0.56%), and Johnson & Johnson (JNJ 1.57%) have what it takes to keep paying shareholders a bit more each year for the long haul.
A safe retail dividend
Tim Green (Wal-Mart Stores): Retail is a tough business, but Wal-Mart is one retailer that will be around for a long time. Not only is the company's U.S. brick-and-mortar business firing on all cylinders, producing 13 consecutive quarters of comparable sales growth, but the online business is booming as well. U.S. e-commerce sales soared 50% year over year during the third quarter of 2017, driven mostly by organic growth through Walmart.com.
The dividend yield is about 2%, driven down by Wal-Mart's surging stock price. But that dividend should be relatively safe. The business is doing well on all fronts, the tax bill that passed late last year should boost the bottom line, and dividend payments account for less than half of the company's guidance for adjusted 2017 earnings.
Wal-Mart's earnings may not grow very fast in the coming years as it pours resources into battling Amazon.com. The company's free two-day shipping program certainly isn't cheap, and it's rapidly rolling out its online grocery pick-up service to its fleet of stores. But Wal-Mart needs to cement itself as a viable alternative to Amazon to thrive in the long run. It's on its way to doing exactly that.
Dividend growth probably won't be anything to write home about, at least in the near-term. But Wal-Mart offers a decent yield and a very low chance of a dividend cut. For retirees, it looks like a solid choice.
Steady, reliable income and growth
Tim Brugger (Cisco): By no means would I suggest trying to time the market. That's a ticket to trouble for any investor, let alone a retiree in search of income. That said, if you happen to be in the market for a conservative, income-producing stock with growth potential, the timing couldn't be better for Cisco.
Last quarter was nothing short of a watershed moment as CEO Chuck Robbins and team continue Cisco's transition to new-ish markets, including cloud software, infrastructure-as-a-service, data security, and the Internet of Things. Not only do each of Cisco's target markets offer tremendous upside, but the company has also turned the corner and is reaping the rewards of its efforts.
The $12.1 billion in revenue Cisco generated last quarter was a 2% decline year over year. It takes time to transform a business, not to mention that revenue declines have narrowed with each passing quarter. Guidance for the current period is for a return to revenue growth of between 1% and 3%.
Another initiative Cisco undertook was to pare overhead: Last quarter offered further proof it's working. Though total revenue was down, earnings rose 4.3% to $0.48 a share. How? Cisco cut operating expenses 7% to $4.7 billion.
Another factor in Cisco's efficiency push is its emphasis on recurring revenue. Relatively low overhead recurring revenue climbed 10% compared with a year ago to $3.87 billion and now represents 32% of all sales. Growth, a sound 3% dividend yield, and relative value are why Cisco stock is ideal for retirees.
A perennial favorite
Cory Renauer (Johnson & Johnson): You're probably familiar with the iconic consumer-health brands that put this company on the map in the 19th century. Retirees should know that J&J now consists of more than 230 distinct business, broadly organized into three operating segments: consumer goods, medical devices, and pharmaceuticals. This diversification has helped the company pay, and raise, its dividend payout for 55 consecutive years.
At recent prices, Johnson & Johnson stock offers a less than thrilling 2.4% yield, but retirees can reasonably expect the payout to keep growing throughout their twilight years. Although the consumer segment isn't breaking any records with steady single-digit sales growth, the $13 billion in annual revenue it generates comprises just 17% of the company's overall top line. That gives the company's red-hot pharmaceutical segment a chance to move the needle forward.
In the third quarter of 2017, Johnson & Johnson's pharmaceutical sales jumped 15.4% to an annualized $38.8 billion run rate. One of the company's blockbuster drugs that lost patent exclusivity has stubbornly held on to its market position, while more recently launched oncology drugs rocket higher. For example, the company launched Darzalex in late 2016, and it already generated an annualized $1.3 billion during the three months ended last September.
Only a few companies on the planet invest more into R&D than J&J, which is why the company has one of the best drug development pipelines in the industry. If you're looking for the perfect stock to provide a steadily growing income stream throughout your retirement years, this is the one.