Most retirees want a few simple things from their stock portfolio. Topping that list is above-average dividend income and low-risk growth. That enables a retiree to collect a steadily growing income stream to help supplement their Social Security.
Several stocks fit these criteria. Three of the top options, which our Foolish contributors are set to take a look at, are material sciences company Dow Inc. (DOW), natural gas pipeline operator Williams Companies (WMB -2.09%), and utility Dominion Energy (D 1.20%).
A 5.5% dividend with room to grow
Maxx Chatsko (Dow Inc.): Can a $41 billion titan of industry really be defined as flying under the radar? Investors could make that argument when it comes to Dow Inc. Although it retained the household brand name of the former Dow Chemical, the company is brand spanking new and comprises the materials science assets of the former Dow Chemical and the former DuPont (not to be confused with the new DuPont, of course).
Despite wielding an industry-leading market share for 14 of the world's most used chemical products, the new company's shares have only managed to match the S&P 500 in their first few months on the stock market. To be fair, that's not much time to make a mark, but investors with a long-term mindset can look over the horizon to see promising potential.
Dow has grown significantly leaner than its namesake. It counts 37,000 employees leading six businesses, down from a headcount of 56,000 toiling away within over 15 business segments at its predecessor. The new business is focused on just three sectors of the economy. The old Dow Chemical slung chemical products into more than 10 parts of the global economy.
The newfound discipline is expected to trim annual capital expenditures to $2.8 billion, sharply lower than the $4 billion per year required previously. That alone should build more resilience into the commodity-linked business, shorten payback periods for investments, and allow management to be more selective when it comes to growth opportunities.
As the full amount of post-separation cost-savings targets are achieved in the coming years, investors should begin to see if management is delivering. The early indications are promising, which makes this dividend stock worth a closer look. Investors who take the leap will earn a 5.5% annual yield for their patience.
High-yield and healthy growth
Matt DiLallo (Williams Companies): Natural gas pipeline giant Williams Companies has turned itself into an excellent income stock over the past few years. The company sold several businesses that had exposure to commodity prices and used the proceeds to pay down debt and invest in expanding its portfolio of stable fee-producing assets. As a result of those moves, Williams now has a much stronger financial profile.
For starters, long-term contracts and other predictable sources supply Williams with 97% of its annual cash flow. Meanwhile, the company only pays out about 60% of that money to support its high-yielding dividend, which is currently 5.9%. That leaves it with a substantial amount of excess cash to invest in growth projects.
Williams Companies currently believes that it can invest in enough expansions to grow its earnings at a 5% to 7% annual rate after this year. That growth rate should support similar yearly increases in its high-yielding dividend. The company should have no shortage of opportunities to expand its natural gas pipeline business in the coming years. That's because North American energy companies need to invest an estimated $23 billion per year through 2035 on new natural gas-related infrastructure projects to support the continent's anticipated growth.
Given these factors, Williams Companies has everything a retiree could want in a stock.
A slow but reliable dividend growth stock
Neha Chamaria (Dominion Energy): Retirees seek three things in a dividend stock: a high dividend yield, stable and preferably growing dividends, and a resilient business model to sustain the two. Dominion Energy is an easy contender.
Now don't let Dominion Energy's "boring" business deter you. More often than not, boring is more beautiful when it comes to dividend stocks. First off, Dominion Energy's 4.9% yield handily beats the S&P 500's yield of 1.9%. Importantly, this yield is backed by steadily rising dividends -- something Dominion can afford given the nature of its business.
You see, Dominion is a typical utility, providing electricity and gas to millions of customers in the U.S. Demand for these services doesn't ebb and flow with the economy but is rather stable. That ensures a steady flow of income for the company. To add another layer of security for investors, Dominion's tariff is regulated, so it has to seek approval for any rate increases from the state public utility commissions. Regulated rates effectively mean stable revenues and cash flows, predictable top-line growth, and efficient capital allocation for timely tariff approvals. This stability and predictability of cash flow explains why Dominion has been to reward shareholders with 15 consecutive years of dividend increases.
Between 2018 and 2023, Dominion projects its rate base (the value of total assets that provide power and gas at regulated rates) to grow by $19 billion, or at a compound annual rate of 7%. The company further projects its operating earnings per share to grow at around 5% through 2020 and more than 5% after that through 2023. Now, Dominion's dividend growth rate is projected to slow down, but that's only to ensure the company can maintain a healthier balance sheet. Eventually, that should work in favor of patient investors, as dividends from Dominion will still continue to grow to back strong yields.