Stability is the name of the game for retirees looking for dividend stocks. A solid yield is important, but more important is a very low chance of a dividend cut. Finding companies that have competitive advantages that will sustain earnings and the dividend far into the future is priority No. 1.
With that in mind, we asked three of our Motley Fool contributors to each discuss a dividend stock perfectly suited for retirees. Here's why General Motors (NYSE:GM), Cisco Systems (NASDAQ:CSCO), and Brookfield Renewable Partners (NYSE:BEP) should be on every retiree's radar.
Too cheap to ignore
Jeremy Bowman (General Motors): The conventional wisdom for retirees is to invest in defensive stocks in sectors like consumer staples, healthcare, and utilities that are reliable even in down markets. However, one problem with that strategy is that those stocks tend to underperform in bull markets like the one we've seen over the last decade.
For retirees then, it's worth diversifying into cyclical companies that tend to do well in expanding economies. General Motors certainly presents an appealing option. The automaker pays a sizable dividend, trades at a low P/E, and is well-positioned for future growth.
Today, the stock offers a dividend yield of 3.8%, and is valued at a P/E of about 6 based on this year's expected earnings. In fact, now may be a great time to buy GM shares after the stock sold off following its recent earnings report. Management cut its guidance due to the impact of tariffs and currency fluctuations, but while the eventual result of trade negotiations is unknown, GM continues to make smart decisions for future growth.
The company is a leader in autonomous vehicle thanks to its earlier acquisition of Cruise AV and is expected to launch a driverless ride-hailing service in New York next year. Considering the stock's valuation, investors seem to be ignoring the huge opportunity in AVs, and a challenge to Uber and Lyft and ride-hailing. GM stock jumped earlier this year when the Cruise division attracted a $2.25 billion investment from the Softbank Vision Fund, a sign of the company's potential in the industry.
Meanwhile, GM is posting record results in China, and its full-size truck plants are running at more than 100% capacity to respond to strong demand. Considering its valuation, competitive strengths, and dividend yield, GM looks like a smart buy for retirees today.
A market leader
Tim Green (Cisco Systems): Cisco investors got a bit of a scare last month when reports emerged that Amazon.com was considering selling cheap networking gear to third parties. Cisco denied those reports, and a spokesperson for Amazon Web Services confirmed that statement, so it seems that Amazon won't be trying to disrupt the market leader in switches and routers after all.
But even if Amazon tried, it would be an uphill battle. Cisco owns more than 50% of the market for networking switches, and simply undercutting Cisco on price wouldn't be enough to pry away customers. Every $1 spent on networking equipment leads to around $15 in operating costs over five years, according to Cisco CEO Chuck Robbins. Total cost of ownership is what matters, so cheap hardware paired with software isn't guaranteed to beat Cisco on price when all is considered.
Long story short, it will take a lot more than a low price tag for customers to flee Cisco. That's important for retirees looking for stable dividend stocks. Cisco isn't going anywhere, and neither is its dividend. The stock currently yields about 3%, and a massive $25 billion share buyback program fueled by last year's tax bill will push down the share count and create room for dividend growth to outpace earnings growth over the next few years.
Cisco's fortunes will rise and fall with the global economy, so tariffs and trade wars could cause some short-term pain. But for retirees looking for a solid, relatively stable tech dividend stock, Cisco is a good bet.
The renewable energy dark horse
Travis Hoium (Brookfield Renewable Partners): Retirees shouldn't be stressing about high-risk stocks, they should be eyeing companies with a steady cash flow that pays dividends for retirement. That's why I think a yieldco like Brookfield Renewable Partners LP is a great choice for retirees.
Brookfield Renewable Partners owns renewable energy assets that generate cash that's then paid to investors in the form of a dividend. Right now, 82% of the portfolio is hydroelectric power plants, but wind and solar energy are growing as energy sources as the company grows. These projects usually come with long-term contracts to sell electricity to utilities, ensuring a stable flow of cash coming into the company.
What drives long-term value for shareholders is the fact that management aims to pay out only about 70% of the cash available from operations as a dividend. The other 30% is poured back into the business to acquire new projects that generate a growing amount of cash. That's how management expects to grow the dividend 5% to 9% organically each year. Given the starting dividend yield of 6.5%, this is a dividend stock that is built on a solid foundation in renewable energy and should provide a great yield for retirees for the foreseeable future.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of General Motors. Timothy Green owns shares of Cisco Systems and General Motors. Travis Hoium owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.