3 Dividend Stocks That Are Perfect for Retirement

Whether you're reading this from a hammock or planning for retirement years from now, these three income stocks can help you to build wealth.

Maxx Chatsko
Maxx Chatsko, Matthew DiLallo, and Demitrios Kalogeropoulos
Jun 29, 2019 at 7:11AM
Energy, Materials, and Utilities

Let's face it: Retirement is expensive. Many individuals fret over the monumental task of adequately saving for a comfortable life once they stop working. Luckily, there are moves you can make to keep your retirement on track and grow your nest egg, including investing in blue chip dividend stocks.

That doesn't mean investors can just look for high-yield income stocks and call it a day. It's important to find dividend stocks that are supported by solid businesses capable of producing healthy amounts of cash flow in any market conditions. With that in mind, we asked three contributors at The Motley Fool for their best dividend stocks for retirement. Here's why they chose Nutrien (NYSE:NTR), Williams Companies (NYSE:WMB), and Home Depot (NYSE:HD).

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A leading digital ag stock

Maxx Chatsko (Nutrien): In the early 2000s, fertilizer stocks were some of the best dividend stocks to own. A combination of agricultural overproduction, shifting global trade dynamics, and more frequent climate events in major breadbaskets have made the last decade significantly less favorable to the fertilizer industry as a whole. That said, there are signs of better days ahead, especially for Nutrien.

Created from a merger between Agrium and PotashCorp, Nutrien is the world's largest fertilizer company. It sold over 27 million tons of potash, nitrogen, and phosphate in 2018. The business generated $2 billion in free cash flow last year. And after recently raising its dividend payout, the stock now boasts a 3.3% yield.

While Nutrien is a fertilizer company at its core, the business is positioning itself to become the agricultural retailer of the future. Retail locations help Nutrien to distribute products ranging from its own fertilizer brands to its quickly expanding digital agricultural platform. The goal: capture as much as 30% of the $40 billion retail market opportunity in the United States through acquisitions and organic growth. It wields 20% market share today, as well as a growing presence in Canada, Australia, and South America, which offer a combined market opportunity of $37 billion. 

Strong retail operations will help to offset inevitable weakness in fertilizer markets, protect cash flows (and the dividend) in rough market conditions, and provide better growth opportunities. Nutrien is attempting to grow retail segment EBITDA from less than $1.2 billion in 2017 to at least $1.8 billion by 2023. To put the importance of the retail segment in perspective, the company expects full-year-2019 adjusted EBITDA of at least $4.4 billion across all of its segments. Given a strengthening balance sheet and a string of intelligent acquisitions, retirees looking to own a piece of the future of agriculture -- and to get paid for doing it -- might want to give the stock a closer look.

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A great balance of growth and income

Matt DiLallo (Williams Companies): Pipeline giant Williams Companies offers retirees the best of both worlds. The company operates a nearly irreplaceable portfolio of pipelines and processing plants that handle 30% of the country's natural gas supplies. These assets provide Williams with predictable cash flow backed almost entirely by long-term, fee-based contracts. Those agreements currently supply the company with enough steady cash flow to cover its dividend -- which yields an above-average 5.5% -- by a comfortable 1.7 times.

Williams uses the cash it retains after paying dividends -- which should tally more than $1.25 billion this year -- to invest in expanding its portfolio. The company currently has several growth projects underway that should increase its cash flow by about 8% this year. That will help support its plan to boost its dividend by 10% to 15% above last year's level.

Meanwhile, Williams has a large inventory of additional expansion projects in development. The company believes it has the financial flexibility to invest in enough new projects each year to grow earnings at a 5% to 7% annual rate starting in 2020, which should support a similar growth rate in its dividend.

These factors make Williams a near-perfect stock for retirement because it offers investors above-average dividend income and low-risk growth.

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Improve your returns

Demitri Kalogeropoulos (Home Depot): The housing market slump that ended around 2010 provided investors with an unusually clear view into the strength of Home Depot's business under stress. Yes, the home improvement giant's profitability dove as sales shrank to $71 billion in 2009 from $79 billion two years earlier. But the company has rebounded nicely since then to demonstrate just the type of resiliency that's perfect for a retirement portfolio.

Sales and profit trends are set to significantly outpace rival Lowe's yet again in 2019, which shows the scope of Home Depot's market share advantage. The chain's operating margin clocked in at almost 15% of sales last year compared to Lowe's 8%. Its smaller peer has tried several initiatives, including price cuts and an inventory refresh, to break Home Depot's momentum. But the market leader just keeps winning share.

Income investors might be excited about Home Depot's long-term outlook, which calls for sales to reach between $115 billion and $120 billion by 2020 -- up from $100 billion in 2017 and $66 billion in 2010. But even if the industry takes a surprise downturn, it's likely that Home Depot, and its quickly growing dividend, will lead home improvement retailing into the next cyclical expansion period.