With dividend stocks, you get some regular income on top of the potential for your investment to grow in value. Dividend stocks aren't as safe as sticking your cash in a savings account, but they're much safer than risky growth stocks, which make more sense when you're far away from retirement.
All dividend stocks aren't created equal -- some are much safer than others. What you want is a company that will stand the test of time and keep sending those quarterly payments for years to come. Three of our Motley Fool investors think Starbucks (SBUX 0.65%), Target (TGT -0.71%), and UnitedHealth Group (UNH -1.98%) fit the bill. Here's why.
Image source: Getty Images.
The world runs on coffee
Nicholas Rossolillo (Starbucks): It hasn't been the greatest of years for the world's largest coffee chain. Sluggish sales growth has been weighing on Starbucks for two years now, with global comparable-store sales in the fiscal second quarter of 2018 coming in at a mere 2%. That's below the targeted 3% to 5% management forecast, and as a result, shares are down 11% year to date as of this writing.
What that means is that it could be a great time to add Starbucks to your retirement portfolio. The stock's dividend currently yields 2.9%, and price-to-earnings based on one-year trailing profits is at 16.7. That's not the best bargain out there, but it seems like a fair price. Even during a slump, the coffee brand has grown overall revenue by 9.8% through the first two quarters of its current fiscal year, and the dividend payout has doubled nearly three times since 2011.
As for the current lull the business is in, Starbucks has a plan -- and it involves more than the elimination of plastic straws. Now-retired Chairman and CEO Howard Schultz has been pumping the still-large opportunity his company has overseas, especially in China. New store openings in the U.S. will slow to accommodate renewed focus internationally, and digital initiatives and rewards programs continue to increase customer loyalty. Plus, a new $25 billion return of cash to shareholders by way of dividend and share repurchases through 2020 was announced, a $10 billion increase from the prior commitment. That's a big number; Starbucks' entire market cap valuation is currently $70 billion.
With shares down and the world's biggest coffee chain only getting bigger, Starbucks stock looks like a great fit for retirees.
An online retailer with a hefty dividend
Tim Green (Target): The retail industry is changing. E-commerce, led by Amazon.com, has become large enough to threaten just about every traditional retailer. Five years ago, many retailers could still produce solid growth while largely ignoring the internet. But those days are over. Categories that have long resisted the shift online, like groceries, are finally being disrupted. No retailer is safe.
The retailers that will survive and thrive will be those that embrace e-commerce while leveraging their stores. There's no better example in my mind than Target. Target has gone into overdrive this year, launching free two-day shipping without any membership fees, a revamped next-day home essentials delivery service, and same-day grocery delivery via its acquisition of Shipt.
The company is using its stores to fulfill orders and keep costs down. During Target's one-day sale earlier this month aimed at combating Amazon's Prime Day, nearly 90% of all orders were shipped directly from the company's more than 1,800 stores. Target doesn't need to spend big to match Amazon's extensive distribution network.
For dividend investors looking for a relatively safe bet, I think Target is a good option. Its online strategy is sound, and its stores are performing well. The dividend currently yields 3.2%, and Target has paid consecutive quarterly dividends since 1967. That dividend has been raised annually for the past 47 years.
In all likelihood, Amazon will continue to dominate online retail for the foreseeable future. But that doesn't mean that Target can't carve out a big piece of the market for itself. The company is making all the right moves, and I think investors will be happy with the results in the long run.
Aging America makes this a top dividend stock
Todd Campbell (UnitedHealth Group): UnitedHealth Group may not offer investors the highest dividend yield in the S&P 500, but its dividend is growing thanks to rising demand for its Medicare Advantage plans, and aging baby boomers suggest that will continue.
As the nation's biggest health insurer, UnitedHealth has a massive presence in the employer-sponsored health insurance market. However, it's the company's Medicare business that makes me a fan of owning this stock in income portfolios for the long haul.
According to the Kaiser Family Foundation, Medicare Advantage enrollment has risen 71% since 2010, and as a result, about one in three Medicare recipients now choose Medicare Advantage over traditional Medicare, up from 22% 10 years ago.
The over-65 population will double in the U.S. by 2050 because of boomers and longer lifespans, and because out-of-pocket spending isn't capped in traditional Medicare, the proportion of people choosing Medicare Advantage to protect their savings is expected to increase to 41% by 2027.
The growing addressable market should be a boon for UnitedHealth, because its 24% market share makes it the biggest Medicare Advantage player. It's already paying off for investors. In Q2 2018, UnitedHealth's revenue jumped by 12% to $56.1 billion -- a remarkable achievement for a company of its size.
Even better, leveraging rising revenue across its fixed costs is fueling profitability that's allowing management to pay more money in dividends to its investors. Its operating earnings were $4.2 billion last quarter, up 13%, and in June, it upped its annual dividend payment by 20% to $3.60 per share. A rally in its share price has kept a lid on its dividend yield, but I think income investors should focus on great companies first and yield second. After all, it's the best businesses that offer investors the best shot at dividend stability and share-price appreciation over time.
