Dividend stocks are a surefire way to boost your retirement income. With dividend stocks, you can not only ear passive income but also earn manifold returns on your stocks by reinvesting the dividends, thanks to the power of compounding. Most companies pay a quarterly dividend, some even monthly. So you continue to earn income through retirement as long as you own these dividend-paying stocks.
That, however, does not mean all dividend stocks fit a retirement portfolio. While investors often seek a high dividend yield, a stable and a growing dividend can help build a nest egg better and faster to support you in retirement. Those qualities, along with strong business prospects, are exactly why NextEra Energy (NYSE:NEE) and Automatic Data Processing (NASDAQ:ADP) are two great dividend stocks to consider for a better retirement.
A utility dividend with solid growth potential
NextEra Energy is one of my favorite retirement stocks for one big reason: Aside from being the largest electric utility in the U.S. in terms of retail sales, NextEra is also the world's largest producer of wind and solar energy. So by owning NextEra shares, you're investing in a defensive dividend-paying stock with solid growth potential. It can't get any better when you have retirement in mind.
NextEra serves customers in Florida -- a state that has seen rapid population growth in recent years. Between 2003 and 2018, NextEra's adjusted earnings per share (EPS) grew at a compound annual growth rate (CAGR) of 7.8%. Dividends grew even faster, at 9.1% during the period. This huge, consistent dividend growth has sent patient investors laughing all the way to the bank.
While past performance doesn't guarantee future returns, NextEra Energy's prospects appear bright for several reasons. First is its solid foothold in the renewable energy industry, the outlook for which is hugely promising. Second is a visionary leadership team: Management consistently outlines growth goals, giving investors a good idea of what to expect from the company in the medium term. For instance, management expects operating cash flow to grow in line with targeted adjusted EPS CAGR of 6%-8% through 2022.
Third is the company's proven commitment to shareholders. I expect at least high-single-digit percentage increases in annual dividends in the near future, which should not just support but even help lift the stock's current dividend yield of 2%. In short, a defensive utility business, clean energy potential, and dividend growth make NextEra a solid contender stock to build retirement wealth.
This lesser-known software dividend stock deserves your attention
Automatic Data Processing is an unknown but an amazing retirement dividend stock.
ADP is a human capital management company that provides payroll, HR, and business process outsourcing services to all sizes and kinds of businesses. ADP currently claims to deliver payrolls to 26 million, or one in every six workers in the U.S., and 15,000 workers internationally. It serves more than 800,000 clients in 140 countries, with no single client accounting for more than 2% of ADP's revenue.
Now that's a pretty diverse business, but you'd wonder how sustainable ADP's business is during periods of a downturn, when layoffs can hit payrolls. The thing is, ADP's professional employer organization (PEO) business, which made up 30% of its revenue in 2019, acts as a great buffer during recession as clients can pass on administrative costs and responsibilities to ADP under the program. PEO is a co-employment program under which essential employer services such as HR, payroll, and tax filings are handled by ADP while the client manages other day-to-day employee needs.
PEO's revenue grew at a solid CAGR of 14% in the past 10 years while revenue from ADP's largest segment, employer services, grew at a compound annual clip of 5% during the 10-year period.
PEO's relative resilience, along with global employment growth, increasing complexities involved with HR and analytics, and ADP's focus on innovation reflects in the company's success over the years. Shareholders have reaped rich rewards from ADP's strong operational performance, both in terms of stock price appreciation and dividends: ADP has increased dividends for 44 consecutive years. The last decade has been a great one for patient investors. In fact, the stock's total returns hugely impress even when you factor in the current bloodbath in the markets.
With management targeting revenue growth of 7%-9%, a comfortable dividend payout ratio of 55%-60%, and dividend yield between 2% and 3% through 2021 (the stock currently yields 2%), ADP makes for a compelling retirement stock.