There's no perfect prescription for what retirement investing should look like, but building a portfolio on a foundation of sturdy, well-rounded dividend-paying companies is a strategy that has tended to serve people well.
With that in mind, we assembled a panel of three Motley Fool investors and asked each member to share some insight on a stock that they believe is a great income-generating vehicle for realizing your retirement goals. Read on to see why they selected Microsoft (MSFT -0.79%), Home Depot (HD -0.34%), and AT&T (T -1.24%) as top dividend stocks for retirees.
A stable tech giant
Tim Green (Microsoft): Software-giant Microsoft has undergone a lot of change over the past few years. It's embraced cloud computing with a vengeance, growing its Azure cloud platform into a strong No. 2 player. It's dropped its "Windows-first" strategy, creating first-class versions of its applications for Android and iOS. And the stock has finally vaulted above the all-time high carved out during the dot-com boom, making Microsoft one of the most valuable companies in the world.
As a dividend stock, Microsoft isn't too shabby. A soaring stock price has pushed the yield down to about 1.9%, but a booming cloud business should provide plenty of earnings firepower to grow that dividend over time. Only about 38% of fiscal 2017 free cash flow went toward the dividend, so there's plenty of room to push the payout higher.
One thing retirees should like about Microsoft is its stability. The company's core Office business, a cash cow for Microsoft, is doing just fine in the age of the cloud. Microsoft has aggressively shifted to a subscription model with Office 365, and results speak for themselves. In the fiscal first quarter, Office 365 commercial revenue surged 42% year over year, and the number of Office 365 consumer subscribers reached 28 million.
The tech industry is inherently fickle, with new technologies disrupting even the strongest of companies. Microsoft isn't immune, but the company is making all the right moves to continue to thrive for decades to come. For retirees who want a reliable dividend, Microsoft is a good option.
Improve your portfolio
Demitri Kalogeropoulos (Home Depot): Home-related expenses are some of the biggest spending categories that retirees have. But rather than shell out for a kitchen remodel, or flooring upgrade this year, consider directing that cash into a stock that's likely to pay you a generous, and steadily increasing, dividend.
Home Depot is wrapping up a banner fiscal 2017 during which sales growth should accelerate to a 6.5% pace from 5.6% in the prior year. Sure, that spike was helped by rebuilding efforts in the wake of hurricanes in Florida and Texas. And these events aren't predictable, or likely to repeat with any regularity. But Home Depot is still outgrowing industry peers by a wide margin. Lowe's (LOW -0.06%) also has a large presence in these areas, but only expects to grow comps by 3.5% for the year.
Home Depot is more profitable than its smaller rival, enjoys better economies of scale, and generates higher return on invested capital. But the metric that's likely to excite income investors the most is its payout ratio. Home Depot executives target sending 55% of earnings back to shareholders each year in the form of dividends, compared to Lowe's 35% promise. And with profits now set to rise 14% in 2017 -- up from management's original 10.5% forecast -- investors are likely to see a double-digit dividend hike when Home Depot closes out its fiscal year in late February.
A dependable telecom titan
Keith Noonan (AT&T): AT&T stock packs a 5.2% yield, a 34-year history of annual payout growth that evidences a clear commitment to returning value to shareholders, and a reasonable 69% payout ratio that suggests it's in good position to keep that commitment alive. Even more important, it's got a business that's built to last.
True enough, AT&T's wireless segment has faced pressure in recent years due to lower-priced offerings from Sprint and T-Mobile, but its competitive advantages will likely reemerge with the rollout of its 5G network. The company's opportunities for service platforms and next-gen network applications for Internet-of-Things technologies have the potential to solidify into long-term growth avenues, as well.
Amid frequent media coverage about cord-cutting, it also wouldn't be hard to get the impression that AT&T's DirecTV unit is on an irreversible slide. While the trend appears to be on track to continue in the United States, the satellite-television business actually has substantial room for growth in Latin America that could offset subscription declines in other markets. If AT&T's bid to acquire Time Warner goes through, the company will emerge as a worldwide leader in entertainment content and enjoy new bundling and targeted-advertising opportunities.
When it comes to stocks that offer big dividends, sustainable payout growth, and an underlying business that's sturdy and well-managed, you won't find many candidates that top what AT&T has to offer. The stock is priced at a non-prohibitive 13 times forward earnings estimates and stands out as a top income play for retirement accounts.