In an ideal world, retirement would be a period of relaxation and relatively stress-free living. But that's not always how it pans out. Some individuals find retirement to be more expensive, stressful, or boring than they envisioned during their working years.
One way to make retirement a little more enjoyable is to make your nest egg go further than you thought possible -- and one way to do that is by owning stable, blue-chip dividend stocks.
Retirees should look for income stocks that pay a generous yield (but not too generous) that's supported by healthy cash flows. With that in mind, we asked three contributors at The Motley Fool for their top dividend stocks aimed at retirement. Here's why they chose Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B), Brookfield Infrastructure Partners (BIP +0.44%), and Pembina Pipeline (PBA +0.07%).
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Disciplined growth at a massive scale
Maxx Chatsko (Royal Dutch Shell): A lot can go wrong for a company with globe-spanning operations, especially if size leads to complexity and inefficiency. Royal Dutch Shell has avoided those pitfalls by keeping it simple and maintaining a disciplined investment strategy. Its success has been compounded by the oil supermajor's massive scale.
In the first quarter of 2019, Royal Dutch Shell reported $6 billion in net income and $8.6 billion in operating cash flow. It expects to generate $28 billion in annual free cash flow in 2020 and then gradually increase that to an astounding $35 billion by 2025. Those figures only require crude oil prices to average $60 per barrel. True, that's a little higher than current prices, but it's also far below the $100 per barrel required a decade ago just to squeak out profits.
Royal Dutch Shell has pledged to maintain its discipline as it redefines the meaning of "healthy" cash flow. It has avoided shiny objects, such as assets in the Permian Basin, because acquisition prices would torpedo its industry-leading return on average capital employed (expected to swell to 12% by 2025). Instead, management plans to return up to $125 billion to shareholders through dividend payments and share repurchases from 2021 to 2025.
The company is also redefining the portfolio composition of an oil supermajor. It has begun acquiring electric utilities, solar-power project developers, and natural gas utilities in select regions. Low-carbon and renewable-energy assets still make up a small part of Royal Dutch Shell's overall business, but with tens of billions of dollars in additional cash flow per year expected soon, investors shouldn't dismiss the possibility that the company will choose to accelerate its clean-energy transition in the next decade.
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The two things every retiree needs in an investment
Jason Hall (Brookfield Infrastructure Partners): In general terms, limited partnerships aren't very good retirement investments. To be specific, they often don't make sense in retirement accounts like a Roth or traditional IRA or 401(k) because they can leave you owing taxes, when one of the biggest reasons to use a retirement account is to avoid having to pay taxes on investments inside those accounts.
That's a shame, considering many MLPs have investment profiles that make them ideal for retirees or near-retirees, typically paying high dividend yields and often having solid track records of increasing their payouts over time.
Fortunately for retirees and retirement savers, Brookfield Infrastructure Partners, one of the best limited partnerships you could invest in, is also one you can ignore the conventional wisdom on, and own in your retirement accounts. As the partnership states, it doesn't -- and never has -- paid out UBTI, the kind of income that can result in owed taxes on retirement account assets.
At recent prices, investors would earn a 4.4% yield. Its payout has been increased every year over the past decade, and is up 184% since the first payout was made. That's been a big reason it's absolutely crushed the market in total returns over that period:
BIP Dividend data by YCharts.
Moreover, investors should expect those strong returns to continue, as demand for transportation, telecommunications, water, and energy infrastructure grows with the global middle class, across every economic environment. People need water, power, and transportation whether there's a recession or economic boom.
Add it all up, and few stocks are as ideal for retirees as Brookfield Infrastructure Partners.
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A monthly income stream
Matt DiLallo (Pembina Pipeline): Pembina Pipeline has everything a retiree could want in an income stock. For starters, the Canadian midstream company pays a well-above-average dividend that currently yields 4.7%. Meanwhile, it backs that payout with solid financial metrics. It gets more than 85% of its income from stable fee-based sources, only pays out about 57% of its cash flow to cover its dividend, and has a strong balance sheet.
Pembina uses the cash flow it retains after paying its dividend as well as its strong balance sheet to invest in growth projects. The company currently has several billion dollars of expansion projects under construction and many more in development. Those expansions will help boost its cash flow in the coming years, giving it even more money to pay dividends. Pembina has an excellent history of increasing its payout, which has grown at a 4.5% annual rate over the last decade.
Meanwhile, it adds to its appeal for retirees because it pays its dividend monthly. That sets it apart from most other stocks that typically pay their investors on a quarterly cycle. In paying a monthly dividend, it provides its investors with an income stream that they can use to help meet their expenses. Add that to the fact that Pembina's dividend is above-average, rock-solid, and growing, and it's an ideal stock for a retiree.
