This year has taken investors on a wild ride. At one point in March, the S&P 500 was down as much as 35% from its peak, but it's since rallied 48% from that low to at least move back into the black for the year. While the COVID-19 pandemic has proven problematic for some companies, it's proven beneficial to others. Traders continue to make bets on how long the fallout from the pandemic will last.
For a certain segment of investors, however, nothing's really changed. Retirees who relied on dividend stocks to deliver income before the coronavirus pandemic are still relying on the payouts from those dividend names. And the good news is, lots of these names are still just as well suited for retirees as they were at the end of last year.
Let's take a closer look at three dividend stocks that retirees should appreciate.
1. Johnson & Johnson is more than you realize
Dividend yield: 2.7%
Johnson & Johnson (JNJ 0.86%) is a name that regularly appears on lists of recommended dividend stocks. Indeed, it's almost become a cliche. But there's a good reason it's become such a frequent go-to name for income-minded investors: J&J has earned it.
There's a part of the company you know very well -- the Johnson & Johnson that makes baby shampoo. Then there's the piece of the company you probably know: Band-Aid brand bandages, Tylenol, Aveeno, Listerine, and other household products are also part of the Johnson & Johnson family.
What many investors and consumers may not fully appreciate, however, is just how much of a pharmaceutical company Johnson & Johnson is. With blockbuster drugs such as Stelara and Remicade in the portfolio along with fast-growers Xarelto and Imbruvica, this company can stand shoulder-to-shoulder with any of the more focused names in the pharma business. On top of that, J&J's medical-device arm accounts for about one-third of its sales.
This degree of diversity is a key reason why the company has been able to increase its dividend payout for 58 consecutive years.
2. Realty Income is holding up surprisingly well
Dividend yield: 4.8%
Shutdowns prompted by the coronavirus pandemic, in turn, prompted several consumer-facing corporate tenants to tell their landlords not to bother looking for rent checks. Struggling apparel chain Gap, for instance, stopped making rent payments on closed stores beginning in April.
Not even the biggest and best real estate investment trusts (REITs) with the strongest tenants have been immune to the impact of the COVID-19 pandemic, including Realty Income (O 1.48%). Shares of the REIT tumbled nearly 50% between February's peak and March's trough, with shareholders scurrying in fear of what was to come. Those shares have bounced back a little since that bottom, but only a little.
The impact of all those shutdowns and subsequently stalled lease payments hasn't been quite as rough on Realty Income as investors seem to have expected, though. For its fiscal quarter ending in June, it was able to collect a little more than 85% of the rent it was owed, and more than 82% of the rent due from its top 20 tenants.
It's not ideal, but it could have been worse. Better still, those collection rates seem to be stabilizing at those levels. If nothing else, shareholders know what to expect. While it may be at above-average risk, the trailing-12-month dividend translated into a healthy dividend yield of 4.8%.
That surprising strength is ultimately a reflection of the strength of Realty Income's tenant base. Walgreens, 7-Eleven, Dollar General, FedEx, and Dollar Tree are its five biggest tenants. They may have been bumped and bruised by the coronavirus outbreak, but they're resilient businesses.
3. Automatic Data Processing represents the new norm
Dividend yield: 2.5%
Unlike J&J and Realty Income, Automatic Data Processing -- you may know it better as ADP -- is a name rarely considered as an income-oriented holding. Its yield is usually healthy but rarely jaw-dropping, and it's not in an industry particularly well known for thrilling results. What Automatic Data Processing may lack in pizzazz, however, it more than makes up for in consistency. The outsourced payroll processor has now increased its payout for 45 consecutive years, and better yet, hasn't had to dip into its savings to pay it. Only a little more than half of its earnings has been used to make dividend payments in recent years. The rest is put back into the coffers to support future growth.
That said, ADP may well be on the cusp of uncharacteristic revenue and earnings growth. Although outsourced human resources services aren't exactly a new idea, it's a concept that's catching on quickly as companies seek to simplify and focus. Technology market research outfit Technavio expects the global payroll outsourcing services market to expand at an annualized pace through 2024, and that's just the payroll part of the mix. Automatic Data Processing is moving deeper into other human resources functions as well, like compliance reporting. Just last week, the company unveiled its simplified 5500 compliance reporting process for retirement plans. This and other additions to ADP's suite of tools are a largely untapped opportunity.