Investors can afford to buy riskier growth stocks when they're younger and have a long runway to ride out the early volatility, but retirees should generally stick with conservative stocks that pay stable dividends. When considering optiona along these lines, it's a good idea to start with the Dividend Aristocrats of the S&P 500, the elite members of the index that have hiked their dividends annually for at least 25 years.
Most of these companies have wide moats, robust cash flows, and dividend yields that exceed the S&P 500's average of 1.8%. Let's take a look at three stocks that pass those tests and belong in your retirement portfolio: AT&T (NYSE:T), Coca-Cola (NYSE:KO), and Target (NYSE:TGT).
1. AT&T: An evolving telecom giant
AT&T is the largest wireless carrier and pay-TV provider in the U.S. It also owns one of the country's top broadband internet businesses, and its takeover of Time Warner makes it one of the world's largest media companies. Those businesses give AT&T a wide moat against its rivals, and it's gradually bundling its wireless, wireline, and streaming services together.
However, AT&T is also struggling with the saturation of the smartphone market, an ongoing loss of pay-TV viewers, and a massive long-term debt load of $151 billion, which was mainly incurred from its acquisitions of DirecTV, Time Warner, and AWS-3 spectrum licenses. It's also plowing lots of cash into the unification of its fragmented ecosystem of streaming services to counter OTT services like Netflix.
Despite these challenges, AT&T's strengths continue to offset its weaknesses. Analysts expect its revenue and earnings to only rise about 1% this year, but its new streaming services, Time Warner's upcoming releases, and 5G upgrades should buoy its long-term growth.
AT&T's low forward P/E of 10 and high forward dividend yield of 5.4% should also set a floor under its stock as its core business gradually evolves. The telco spent just 51% of its free cash flow (FCF) on its dividend over the past 12 months, and it's raised its payout annually for 35 straight years.
2. Coca-Cola: An aging soda maker that hasn't gone flat
Coca-Cola is the world's largest beverage maker. In addition to its flagship soda, it owns over 500 global brands, including Sprite, Fanta, Barq's, Powerade, Minute Maid, Dasani, Simply, Smartwater, Fuze, and Costa Coffee. It also owns nearly a fifth of energy drink maker Monster Beverage.
Coca-Cola has struggled with declining soda consumption rates over the past three decades. To counter that paradigm shift, it launched lower-calorie and sugar-free versions of its sodas, while expanding its portfolio with non-carbonated beverages like teas, juices, sports drinks, and bottled water. It also tested new products like Coca-Cola Coffee, Coca-Cola Energy, and alcoholic beverages.
Those forward-thinking strategies enabled Coca-Cola to generate consistent growth even as health-conscious consumers drank less soda. As a result, Wall Street expects its revenue and earnings to rise 5% and 7%, respectively, this year.
Coca-Cola's forward P/E of 24 looks a bit frothy relative to its earnings growth, but its stable returns and wide moat arguably justify that premium. It's also an ideal stock for income investors: It spent 81% of its FCF on dividends over the past 12 months, pays a forward yield of 2.7%, and has raised its dividend annually for 57 straight years.
3. Target: A retail survivor with room to run
Target's stock nearly doubled last year as the retailer's strong comparable store sales growth, double-digit comps growth, and expanding margins impressed investors. It survived the retail apocalypse by expanding its e-commerce ecosystem, matching Amazon's prices and delivery options, and turning its existing stores into fulfillment centers for online orders.
Target is also opening new stores as other retailers reduce their brick-and-mortar footprints. Its total store count rose from 1,822 at the end of 2017 to 1,868 locations today, and 75% of the U.S. population now lives within 10 miles of a Target store.
Target's growth seemingly comes at the expense of other struggling retailers like J.C. Penney, Macy's, and Kohl's. It's also expanding its grocery business with new private label brands like Good & Gather, which should widen its moat against Amazon's Whole Foods and other supermarkets.
Target's growth unexpectedly decelerated during the holiday season, but it faced tough comparisons to the prior year and cyclically soft sales of consumer electronics and toys. Analysts still expect its revenue and earnings to rise 4% and 8%, respectively, next year -- which are solid growth rates for a stock that trades at 17 times forward earnings.
Target pays a forward dividend yield of 2.3%. It's raised that payout annually for 52 straight years, and it spent just 38% of its FCF on that dividend over the past 12 months, which gives it plenty of room for future hikes.