If you're retired, an ideal retirement portfolio should include both bonds and income-producing stocks. Fixed income is appropriate for retirees because bonds -- at least most Treasury, municipal, and investment-grade bonds -- tend to safely retain their principal value while also throwing off cash in the form of interest payments.
However, an allocation to dividend-paying stocks is also encouraged. After all, high-quality stocks not only pay out dividends, but can also grow that dividend and principal value over time. And with the average life expectancy having risen to 78.7 years as of 2018, dividend growth stocks are likely a necessary part of retiree portfolios, especially for those just entering retirement.
Which stocks to pick? While many retirees often focus entirely on a stock's dividend yield , a payout that is too high often means higher risk, putting not only that dividend but also your principal at risk.
So first and foremost, retirees should focus on the underlying quality and long-term prospects of a business, with dividend yield a secondary concern. After all, at this stage of life, protecting principal for the long-term is the first concern.
In that light, here are three extremely high-quality dividend stocks in three different sectors that retirees should consider buying today.
Procter & Gamble
Procter & Gamble (PG 0.97%) is the world's largest consumer staples stock, with a portfolio spanning shampoo, soap, detergent, diapers, shaving, and other product categories customers need at all times, especially during a pandemic.
But Procter & Gamble isn't just about size. It's also growing at a brisk pace, and actually better than most of its smaller peers. Last quarter, revenue grew 6% organically, with nine of the company's 10 categories showing organic growth. Importantly, earnings per share surged an even higher 15% in constant currency.
Confidently, even in the face of COVID-19, Procter & Gamble recently raised its dividend 6%, the sixty-fourth year in a row that P&G has raised its dividend, putting it firmly in dividend aristocrat territory. After the hike, the stock now yields a respectable 2.7%.
With a safe product portfolio, best-in-class growth, expanding margins and increasing dividends, Procter & Gamble is an ideal safety stock for retirees.
Taiwan Semiconductor Manufacturing
One doesn't normally associate the cyclical semiconductor industry as being "safe," but Taiwan Semiconductor Manufacturing (TSM 1.50%) isn't exactly a semiconductor stock. Instead, it's the word's largest and most-advanced outsourced foundry for other chipmakers. That means that when the very top technology companies in the world such as Apple (AAPL 2.14%) design their own chips but don't want to manufacture it themselves, they turn to Taiwan Semi to do the heavy -- and expensive -- lifting.
So no matter which "chip" company wins out in the race for 5G phones, base stations, graphic chips, or high-performance processors, Taiwan Semi will likely produce the winner. And with semiconductor content and complexity only increasing in mobile phones, connected cars, "smart" homes and factories, and artificial intelligence applications, Taiwan Semi's business is almost certain to grow over the long-term.
Taiwan Semi also achieved a unique feat of being the first chip manufacturer to produce a leading-edge 7nm chip, overtaking Intel's (INTC 1.46%) in-house manufacturing as the processor giant stumbled in that complicated transition. Not only that, but Taiwan Semi is pushing ahead on 5nm chips to be produced later this year.
Despite the coronavirus downturn, Taiwan Semi's unique manufacturing capability is keeping its services in strong demand. Recently, management guided for mid-to-high teens growth this year, even when factoring in a coronavirus slowdown.
Taiwan's rock-solid competitive position and strong balance sheet affords it to pay out 70% of its free cash flow as dividends. That yield currently stands at 3.1%, but that payout seems poised to grow in the years ahead as technology becomes more and more important to daily life.
Private equity giant Blackstone (BX) might not seem like a "safe" dividend stock. While its current dividend yield is 5%, that payout isn't consistent, instead fluctuating with Blackstone's earnings quarter-to-quarter.
In addition, the current market environment may seem challenging for all asset managers. Private equity firms raise investor capital, then combine that equity capital with debt to buy entire companies, divisions, or real estate assets. They then fix them up, and resell them at a profit.
Obviously, lots of Blackstone's current assets have been marked down in the first quarter, as the coronavirus downturn has led to a widespread economic slowdown. In addition, good luck selling assets in the current environment -- Blackstone is unlikely to see any realizations this quarter and probably not very much for the rest of this year.
However, there are a few other things to consider. First, Blackstone earns steady management fees on its assets under management (AUM), aside from its asset sale profits. Last quarter, net earnings from management fees alone totaled $468 million, or $0.39 per share. Annualizing that figure comes to $1.54, good for a yield of 3.2% just from management fees alone.
And Blackstone's AUM continues to grow, as it continues to raise massive amounts of cash thanks to its sterling reputation and terrific decades-long track record of successful investing. Last quarter, total AUM grew 5% to a stunning $538 billion, with fee-earning AUM up 20% to $423.1 billion.
Most importantly, Blackstone's AUM includes a massive $151.5 billion pile of "dry powder," or cash that Blackstone has raised but has not yet invested. Obviously, with the onset of COVID-19 and many companies and assets becoming distressed, one can be sure Blackstone's top investors will be able to deploy that huge pile of cash into very undervalued assets. That portends very well for Blackstone's future growth once these assets recover.
Blackstone used to be a publicly traded partnership, which stuck its public shareholders with a higher burden at tax time. However, in mid-2019, the company converted to a C-corporation, adding a small tax burden to the company, but taking away the tax burden for its public investors, and freeing up many pension funds and mutual funds to invest in its stock. Since then, Blackstone's share price has skyrocketed, even after factoring in the recent swoon from COVID-19. I expect the positive trend to continue over time, which means long-term dividend investors should take advantage of the recent pullback in this top asset manager.
Dividends and quality
Procter & Gamble, Taiwan Semiconductor, and Blackstone are all in different industries, but they all have two things in common: they are best-in-class companies with competitive advantages over rivals, and they pay a nice dividend that should grow over time. That makes each stock an ideal pick for retirees.