If there's one tried-and-true method of wealth creation and a path to a more secure retirement, it's buying solid dividend-paying companies and holding for the long term. However, investors want to avoid the trap of simply buying into the highest yields they can find with no regard for the quality of the company. Don't get me wrong: A substantial yield is fine, as long as it's accompanied by a stable business and the potential for future gains. Finding an income payer that meets those criteria can, however, be a challenge, and finding one that meets an investor's specific needs might seem downright impossible.
In an effort to offer a helping hand, we asked three Motley Fool investors to choose solid income payers that could help fund your golden years. Read on to find out why they chose Apple (NASDAQ:AAPL), American Tower (NYSE:AMT), and IBM (NYSE:IBM).
So much more than the iPhone
Danny Vena (Apple): While Apple may have temporarily fallen out of favor due to slowing iPhone sales, the company boasts the undying devotion of none other than Warren Buffett. The legendary investor stumbled upon Apple quite by accident, with one of his top stock pickers making the first purchase. Buffett became so intrigued by the selection that he began stocking up on shares of his own accord.
Those purchases have continued for more than two years, with Berkshire's stake in Apple climbing to over 240 million shares -- or about 5% of the company. As of this writing, the stock is trading north of $191, making Berkshire's stake worth a mind-boggling $46 billion.
When asked to explain his love affair with Apple, Buffett hit back at investors that only look ahead to the next quarter, pointing in a May interview with CNBC to his much longer time horizon:
Nobody buys a farm based on whether they think it's going to rain next year or not. They buy it because they think it's a good investment over 10 or 20 years ... The idea of spending loads of time trying to guess how many iPhone X ... are going to be sold in a given three month period, to me, it totally misses the point.
While the iPhone accounted for the lion's share of Apple's revenue last year -- at about 67% of sales -- CEO Tim Cook and company have been working to reduce dependence on the flagship device. Apple's wearables business, while growing from a much smaller base, grew 38% year over year in the most recent quarter, while services jumped 31% -- now representing 15% of Apple's total revenue.
Apple recently increased its dividend by 16%, having nearly doubled its quarterly payout since 2012, and the stock currently yields about 1.6%. While that may not seem like much, the company is using less than 25% of its profits to fund the dividend, so there's likely much more to come. Apple also initiated a massive $100 billion share buyback, saying it would acquire shares "at a very fast pace."
With all those things going in its favor, investors looking to fund a nest egg should definitely look to Apple.
Tap into the growing mobile data usage trend
Chris Neiger (American Tower): Smartphones are nearly ubiquitous in the U.S., and as they've grown in popularity, the amount of wireless data they use has grown as well. That's good for wireless carriers because they can offer unlimited data plans at higher monthly costs, but all of that data usage weighs on their networks as well. So what's a carrier to do? Enter American Tower.
American Tower owns wireless towers across the the globe and rents them out to carriers so they can add more data capacity to their networks. Carriers sign long-term contracts with American Tower and those deals allow the company to bring in about 98% of its sales from recurring revenue.
Right now, it has about 160,000 towers worldwide and its management believes usage on these towers is poised to increase. That's because mobile data usage is expected to increase sevenfold between 2016 and 2021, according to Cisco. That growth is being fueled by the rise of mobile video and the fact that in the next three years there will be 6.2 billion smartphones worldwide.
American Tower pays a forward dividend of about 2.1% right now, and because the company is set up as a real estate investment trust (REIT), American Tower has to pay out most of its net income as dividends. With data usage climbing worldwide and the company already benefiting from rising usage in the U.S., American Tower looks like a good dividend bet for an increasingly connected world.
A slow-growth tech giant
Leo Sun (IBM): IBM is the poster child of slow-growth tech stocks. The company is desperately trying to grow its "strategic imperatives" -- which include its higher-growth cloud, mobile, analytics, security, and social businesses -- to offset the ongoing slowdown of its legacy IT services and business software units.
After six years of revenue declines, IBM's sales finally rose over the past two quarters. Wall Street expects its sales to rise 2% this year and for its earnings to grow 1%. Those figures seem anemic, but they indicate that its focus on those strategic imperatives -- which accounted for nearly half of its revenue over the past 12 months -- are paying off.
IBM won't transform into a high-growth company anytime soon, and it still faces plenty of tough competitors in the cloud market -- including Amazon, Microsoft, and Alibaba. However, Big Blue still has an impressive presence in the enterprise market, where customers rely more on private and hybrid clouds instead of public deployments.
Though IBM trades at just 10 times forward earnings, it pays a hefty forward dividend yield of 4.4% -- and it's hiked that payout annually for 23 straight years. IBM spent just 41% of its free cash flow on its dividend over the past 12 months, so it could soon become a Dividend Aristocrat -- an S&P 500 component that raises its payout for 25 straight years. IBM isn't an exciting growth stock, but it's still an ideal income play for retirees.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Neiger has no position in any of the stocks mentioned. Danny Vena owns shares of Amazon and Apple and has the following options: long January 2019 $80 calls on American Tower and long January 2019 $165 calls on IBM. Leo Sun owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, American Tower, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short October 2018 $135 calls on American Tower, and long January 2019 $80 calls on American Tower. The Motley Fool has a disclosure policy.