Though there are a number of great retirement tools for Americans to choose from, an individual retirement account, or IRA, is arguably the most intriguing.
IRAs come in two forms, thereby allowing everyone to participate. The traditional IRA provides up-front tax benefits based on the amount contributed, then is taxed once distributions begin during your golden years. Meanwhile, a Roth IRA provides no up-front tax benefits, but treats eligible withdrawals as tax-free income. Thus, if you wind up contributing to, and investing in, a Roth IRA for multiple decades, this back-end-loaded tax benefit can be huge.
But the most under-the-radar benefit of IRAs is that the end of the calendar year doesn't mark the end of the contribution period. You see, Americans have the opportunity to add to their IRA up until Tax Day of the current year, yet have that contribution count toward the previous year. As an example, an individual could choose to contribute $3,000 toward their IRA on April 14, 2020, yet have that contribution count toward their limit for 2019.
In 2019, Americans were allowed to contribute up to $6,000 to a traditional or Roth IRA if under the age of 50, with a $1,000 catch-up clause (therefore, $7,000 maximum annual contribution) if aged 50 and over.
This means that, despite it being January 2020, you still have time to add a number of rock-solid dividend stocks to your IRA for the 2019 tax year. Here are three such names I'd encourage you to consider.
The entire idea of putting your money to work in an IRA is to allow it to grow over long periods of time without having to worry about your investment. That means boring businesses tend to be excellent choices for an IRA. That's why telecom giant AT&T (NYSE:T) gets the nod.
Less than a month ago, AT&T kept its incredible streak going of increasing its annual payout. The 2% increase announced by the company, which has pushed its yield to 5.4%, marks the 36th consecutive year that AT&T has increased its dividend. Based on yield alone, investors would receive a complete payback on their investment in less than 14 years.
The beauty of AT&T's business has to do with its wireless subscriptions. Not only are smartphones something of a necessary good in today's society, but being a subscription-based business makes it far less likely that consumers would cancel or pare down their usage during a recession. This leads to some of the most predictable cash flow of any company in the S&P 500.
What's more, we're on the verge of a major wireless infrastructure upgrade. The rollout of 5G networks is bound to lead to the biggest tech upgrade cycle that we've witnessed in almost a decade. That's great news considering that AT&T generates the bulk of its margins from data. Even though AT&T's high-growth days are long gone, 5G should be a multiyear growth boon for the company that'll keep its dividend streak going.
Speaking of 5G, another business that investors should strongly consider adding to their IRAs is Broadcom (NASDAQ:AVGO), a manufacturer of wireless chips for smartphones and broadband access chips.
We don't often think about companies in the tech sector when scouring for rock-solid dividend stocks, but Broadcom certainly breaks from the mold. Over the past eight years, the company's quarterly payout has grown by more than 2,600% -- from $0.12 to $3.25 per share. That gives Broadcom one of the fastest-growing payouts, and places the company in high-yield territory with a 4.1% yield. This level of income is uncommon for a large company that's capable of high-single-digit long-term growth.
It's also worth noting that since the U.S. federal government rejected Broadcom's proposal to acquire Qualcomm in March 2018, the company has far more cash at its disposal now than if that deal had gone through. This would seemingly bode well for improved shareholder returns over time.
Of course, the bigger thesis here, beyond Broadcom's amazing dividend, is that it'll benefit from the 5G rollout. Not only are Broadcom's wireless chips used in next-generation smartphones, but its connectivity/access chips are mainstays in data centers that are being used to run the cloud.
Johnson & Johnson
Lastly, consider what might be the safest dividend stock on the planet, healthcare conglomerate Johnson & Johnson (NYSE:JNJ). How "safe" is J&J? Well, of all the publicly traded companies in the U.S., it's one of only two to hold a AAA credit rating with Standard & Poor's. To put this into context, Standard & Poor's has more faith in Johnson & Johnson repaying its debts to lenders than it does of the U.S. federal government making good on its debts (the U.S. government holds a AA credit rating).
Like AT&T, Johnson & Johnson is part of a group of special dividend stocks known as Dividend Aristocrats. These are S&P 500 companies that have raised their payouts for at least 25 consecutive years. In Johnson & Johnson's case, it's truly elite, with 57 consecutive years of increased payouts. J&J's current yield of 2.6% is nicely above the average yield of S&P 500 companies, and further dividend increases appear likely with a payout ratio of 42% (based on Wall Street's 2020 consensus earnings per share).
What makes J&J tick are the company's three business segments, each of which brings something vital to the table:
- Consumer healthcare, while being the slowest growing, provides highly predictable cash flow and solid pricing power.
- Medical devices, while slow-growing in the near term, offers a long-run growth opportunity as the global population ages and leans on devices to improve quality of life.
- Pharmaceuticals provides the bulk of J&J's growth and margins, but is constrained by a finite period of exclusivity.
Since no one gets to choose when they get sick or what ailment(s) they develop, a healthcare company like Johnson & Johnson is a great addition to any IRA.