Social Security will only replace about 40% of an average retiree's income. That falls well short of the estimated 70% of preretirement income needed to maintain a similar standard of living, and that doesn't count the potential for continued high inflation of medical costs. The good news, though, is that retirees have several ways to supplement their Social Security income and bridge that gap, including benefiting from a pension plan, working part time, buying annuities, and investing in dividend-paying stocks.
Dividend stocks not only provide an income stream but also can help offset rapidly rising costs, since many companies increase their payouts each year. Three excellent dividend growth stocks for supplementing Social Security are gas pipeline company Williams Companies (NYSE:WMB), global telecom tower giant American Tower (NYSE:AMT), and clean-energy powerhouse NextEra Energy (NYSE:NEE). Here's why retirees might want to consider this trio of income stocks.
Stable income with steady growth
Check out the latest Williams Companies earnings call transcript.
Williams Companies currently pays an attractive dividend that yields about 5.1%, which is more than double the 2% average of stocks in the S&P 500. One factor that makes that payout ideal for retirees is that it's on a firm foundation. For starters, 97% of the company's cash flow comes from stable and predictable long-term contracts. Meanwhile, Williams pays out less than 60% of its cash flow in dividends, which is conservative for a pipeline company. That combination of cash flow stability and a low payout ratio should give retirees confidence that Williams Companies can sustain its payout through both good times and bad.
Adding to the attractiveness of Williams Companies' dividend is its growth potential. After completing a large pipeline expansion last year, Williams Companies expects earnings and its dividend to grow at a double-digit rate in 2019. Meanwhile, with several additional growth projects under construction and more in development, Williams anticipates that it can increase earnings at a 5% to 7% annual pace beyond this year, which could support a similar dividend growth rate. That combination of a rock-solid high-yielding dividend and visible growth prospects makes Williams a great option for retirees.
High-powered dividend growth
Check out the latest NextEra Energy earnings call transcript.
NextEra Energy currently pays an above-average dividend that yields 2.5%. That payout is also on solid ground, making it ideal for retirees. For starters, NextEra's utility segment generates very stable cash flow as it transmits and distributes electricity and natural gas to customers in Florida. Meanwhile, the company's energy resources segment produces steady income backed by long-term contracts with power purchasers and natural gas customers. In addition to that, NextEra only pays out about 58% of its cash flow in support of the dividend, which is well below the average of most utility companies.
While that rock-solid above-average payout alone makes NextEra an ideal stock to supplement Social Security, what takes the clean-energy giant's payout to an even more attractive level for retirees is its growth potential. In the company's estimation, it can increase its dividend by a 12% to 14% annual rate through at least 2020, which is more than double the expected 6.2% average growth rate of stocks in the S&P 500. Two factors support NextEra's dividend growth plan. First, the company expects to grow earnings by at least a 6% to 8% compound annual rate through 2021 while at the same time increasing its payout ratio. That fast-growing income stream could come in handy to offset rising expenses in retirement.
Steady income with lots of growth ahead
Check out the latest American Tower earnings call transcript.
American Tower's dividend currently clocks in right around average at 2%. That payout, like the others, is also on solid ground. One factor driving that view is that American Tower generates very stable cash flow because it signs long-term leases with tenants for space on its communication towers. Meanwhile, it only pays out about 43% of its cash flow in support of its dividend, which is well below the level of most real estate investment trusts.
While American Tower's current yield is right around average, it more than makes up for that with an outsized growth rate. The company has expanded its payout at a 24% compound annual growth rate since 2012, including a 20% increase over the past year. That fast-paced growth should continue in the coming years as the company builds and buys more towers -- which could grow cash flow at a double-digit annual pace -- as well as increases its dividend payout rate. That well-above-average dividend growth rate sets retirees up to collect a much larger income stream in the future, which could help them supplement the anticipated rapid rise of medical expenses.
Great options for retirement income
Retirees can't rely on social security alone, since it won't provide enough income to meet their needs, especially when factoring in high inflation rates for things like medical expenses. That's why retirees need to find supplemental sources to bridge that gap, and this trio of dividend stocks is an excellent option. Not only should they provide a rock-solid income stream, but those dividends should grow at a much faster pace than inflation, which could go a long way in helping retirees meet their needs.