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3 Dividend Stocks Ideal for Retirees

By Rich Duprey, Anders Bylund, and John Bromels – Updated Apr 11, 2019 at 10:05PM

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When your means become limited, having a rock-solid portfolio can help when times get tough.

Analysts say we can expect more market volatility this year and that we may be heading for a recession. Retirees and those about to retire are likely especially worried about what such a scenario would mean for their portfolios.

But because retirement is a time of limited ability to generate new income, having a portfolio of stocks that you can count on through good times and bad is particularly important. With this in mind, three Motley Fool contributors find Walt Disney (DIS -0.01%), BP (BP 0.83%), and Diageo (DEO 0.60%) ideal stocks for retirees.

Mature couple looking at a map

Image source: Getty Images.

This Mickey Mouse dividend is dead serious

Anders Bylund (Walt Disney): The House of Mouse deserves more respect from the dividend-investing community than it gets. With a modest 1.6% dividend yield, the stock is easily overlooked. A quirky semi-annual payout schedule instead of the more common quarterly payouts might also cloud the picture a bit. But Disney is pumping more than $2.5 billion into dividend payments each year and has grown those payouts five times larger over the last decade. And all of this shareholder-friendly goodness is powered by one of the most effective cash machines I know.

Put all of that together, and the forecast calls for stable and rising dividend payouts for the foreseeable future.

At first glance, the pending merger with Twenty-First Century Fox (FOX) (FOXA) looks like a threat to Disney's dividend growth, but the deal actually won't drain the company's cash coffers. Instead, Disney will swap out existing Fox shares for freshly printed Disney stubs. And Fox's own dividend policy comes with a billion-dollar annual budget of its own, arguably allowing Disney to make up for the dilutive effect of adding more shares by adding Fox's old dividend budget to the combined company's total payouts.

So we're looking at a peerless consumer brand with miles and miles of proven business muscle, paired with a generous and growing dividend policy. That's an income-generating machine for the long run, and you'll never lose a minute of sleep worrying about Disney's future. Sounds like a winning retirement strategy to me.

Check out the latest Disney earnings call transcript.

Income that keeps coming in

John Bromels (BP): The first thing many retirees will like about BP is its current dividend yield: At a mouth-watering 6.4%, it's one of the highest in its industry. But since most retirement portfolios need to last for decades, a stock's current yield isn't necessarily a good indication that it's right for retirees.

BP has also been posting stellar performance over the past year, thanks in large part to rising oil prices. On a trailing-12-month basis, for example, BP's net earnings have skyrocketed more than 150%. In its most recent quarter, Q3 2018, revenue was up 32.9% and net earnings were up 93.2% over the prior year. 

It's great that BP can perform well when times are good, but over the course of 30 (or, hopefully, more) years, a retiree's portfolio is going to encounter slow periods as well. Thankfully, BP and its dividend have a solid track record during turbulent times, too.

During the oil price slump of 2014-17, for example, when many smaller oil and gas companies were slashing dividends, BP held its payout steady. That was possible thanks in large part to its lucrative downstream (refining and marketing) arm, which isn't as dependent on oil prices as its upstream (exploration and production) arm. 

In fact, BP has cut its dividend only once in the last 15 years: back in 2011, during the aftermath of the Deepwater Horizon oil spill in the Gulf of Mexico. Even that incident -- about as big a catastrophe as an oil company could ever expect to encounter -- didn't force BP to eliminate its dividend, although the company reduced it by 50%. That demonstrates BP's commitment to rewarding its shareholders and the reliability of its payout. Overall, BP is an excellent choice for a retiree's portfolio.

I'll drink to that

Rich Duprey (Diageo): Diageo is the world's largest distiller, and makes most of its money selling Johnnie Walker scotch whisky, the global leader in scotch, but also has some of the best-known spirits on the market too, including Smirnoff vodka, Captain Morgan spiced rum, and Bailey's cream liqueur.

The distiller is making a play to corner the premium-and-above category in spirits, and recently sold off most of its value brands. Diageo is looking to distinguish itself in the space as Nielsen data indicates ultra-premium spirits are the fastest-growing segment in spirits. High-end spirits account for 55% of total volume and 62% of dollar sales.

The moves to insulate itself from the vagaries of the lower end of the market make Diageo a good candidate for a retiree's portfolio; should the economy go into recession, the distiller will feel it less. Diageo's chairman seems to agree as he recently spent $1.3 million to buy a tranche of 35,000 shares of the company's stock.

The other benefit of Diageo stock for the retiree investor: It pays a dividend that yields 3% annually. The distiller's payout ratio of 77% means that although the dividend is covered, it's on the high side and investors may not see many increases. Analysts, though, are forecasting earnings to grow to $7.38 per share this year, which means the payout ratio will fall to around 56%. We'd like to see it go even lower, and as the company focuses on the premium-and-above category while eliminating its value spirits, the payout ratio should head even lower.

Anders Bylund owns shares of Walt Disney. John Bromels owns shares of BP, Diageo, and Walt Disney. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Diageo. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Walt Disney Stock Quote
Walt Disney
$98.87 (-0.01%) $0.01
Diageo Stock Quote
$184.11 (0.60%) $1.10
BP Stock Quote
$35.27 (0.83%) $0.29
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.

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