Please ensure Javascript is enabled for purposes of website accessibility

3 Dividend Stocks Ideal for Retirees

By Keith Noonan, Maxx Chatsko, and Leo Sun – Aug 26, 2018 at 6:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These three stocks have characteristics that could help make your retirement golden.

Owning a portfolio of high-quality, income-generating stocks can help you build a bountiful nest egg that allows you to experience your retirement years free of burdensome financial concerns. Whether that means spending more time with family and loved ones, doing more traveling, or simply not fretting about bills, accounts, and expenses, that's a goal worth pursuing.

To aid you in that pursuit, we asked three Motley Fool contributors to select a stock that they believe will help you create the financial security needed to enjoy your nonworking years in style. Here's why they identified NextEra Energy (NEE -0.56%), Macy's (M 1.33%), and Realty Income (O 0.46%) as investment vehicles that are perfect for retirees.

A golden egg in a nest.

Image source: Getty Images.

A solid yield with great potential

Maxx Chatsko (NextEra Energy): Shares of NextEra Energy have smoked the total return of the S&P 500 in the last five years, besting the index 147% to 91%. That works out to an average annual return of nearly 20%. Sure, investors can find a higher dividend yield than the stock's current 2.6%, but it would be difficult to match the combination of business growth and income.

While investors probably shouldn't expect to collect annual returns of 20% in the next five years, a strong history of above-average returns and an ambitious growth strategy make NextEra Energy a leading candidate for beating the market in future periods. The company's utility, Florida Power & Light, grew GAAP net income 19% in the second quarter of 2018 compared to the year-ago period. The company's power generation subsidiary, NextEra Energy Resources, increased adjusted net income 16% in that span. 

Both subsidiaries delivered growth thanks to contributions from growth projects, which has been the simple strategy that has powered NextEra Energy for the last couple of decades. There are no signs the business is running out of opportunities. Florida Power & Light is starting the process of transitioning its generation mix to favor solar power, NextEra Energy Resources is in the process of growing its nationwide renewable energy power project backlog to an astounding 40,000 megawatts by 2020, and the recent acquisition of Florida City Gas will add a third reporting subsidiary beginning in the second half of 2018.

All of that bodes well for the parent company's plans to grow its dividend 13% per year through at least 2020. Simply put, NextEra Energy is an ideal stock for retirees -- and just about anyone else.

A robust retail survivor

Leo Sun (Macy's): Macy's was recently slammed after its second-quarter earnings report, although its top- and bottom-line growth topped Wall Street's expectations. Nonetheless, the retailer's stock remains up about 85% over the past 12 months, thanks to a gradual turnaround effort involving better e-commerce efforts, the expansion of its Backstage off-price retail chain, and the monetization of its real estate.

Those efforts helped Macy's post positive owned-plus-licensed comparable-store sales over the past three quarters. It expects that trend to continue with 2.1%-2.5% total comps growth for the full year. Macy's also boosted its guidance for the top and bottom lines for the year last quarter. It now expects its sales to rise 0.7%, and for its adjusted earnings to improve by 5%-10%.

Those numbers aren't jaw-dropping, but they indicate that Macy's is avoiding the fate of other mall anchors like J.C. Penney (JCPN.Q) and Sears Holdings (SHLDQ), which were crushed by e-commerce rivals, superstores, and off-price retailers. Macy's slightly reduced its inventories year over year last quarter, as its gross margin rose 80 basis points to 40.4% -- indicating that the company's overall health is improving.

Macy's currently trades at just 10 times forward earnings and pays a forward dividend yield of 4.2%. The company spent just 40% of its free cash flow on that dividend over the past 12 months, and it's raised that payout for seven straight years. That low valuation and high yield make it a great long-term income play for retirees.

Enjoy dependable monthly income

Keith Noonan (Realty Income): For those looking to generate regular income in their nonworking years, Realty Income stock is a standout choice. Unlike most other companies that distribute payouts annually or biannually, Realty Income cuts monthly checks to its shareholders. 

This characteristic is so central to the stock's appeal that Realty Income refers to itself as "The Monthly Dividend Company." With that kind of branding and a history of raising its payout on a quarterly basis since 1997, it's clear that providing its stockholders with regular dividends is a top priority. Investors can feel confident that Realty Income's sturdy business has the company in good position to keep the cash flowing. 

Realty Income is a real estate investment trust (REIT) and rents out retail properties and office buildings, typically on long-term contracts that make its sales and earnings safe and predictable. Renting to retail outlets in the throes of the ongoing e-commerce revolution might seem like a shaky foundation, but Realty Income's business actually looks quite sound.

Its list of enterprise lessees includes fitness centers, movie theaters, pharmacies, gas stations, and discount outlets -- businesses that should be resilient amid the online-retail surge. Evidencing the fact that it has yet to feel the e-commerce squeeze, the company currently boasts a 98.7% occupancy rate, and it's still growing its business by acquiring new properties and raising rental rates.

For retirees, monthly dividend distributions can be a big perk -- providing shareholders with income on a more frequent basis that can make budgeting easier, and Realty Income also boasts a sizable payout. With a chunky 4.5% yield, monthly distributions, and a strong business that should allow the company to continue boosting its dividend, Realty Income is an ideal stock for retirees.

Keith Noonan has no position in any of the stocks mentioned. Leo Sun has no position in any of the stocks mentioned. Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.