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2 Dividend Stocks to Supplement Your Social Security

By Dave Kovaleski - Dec 5, 2020 at 8:15AM

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One of these companies is a Dividend Aristocrat, the other is on its way there.

Results from some of the latest surveys about financial security in retirement suggest an increasing concern among Americans. Take, for example, a November survey by retirement website SimplyWise that found that 43% of Social Security beneficiaries worry about outliving their retirement savings, up from 38% in its May survey. The November survey also found 74% of current workers expect to work in retirement -- up from 65% back in May. The report also found the coronavirus pandemic, which has resulted in financial hardships for many, has forced a growing number of Americans -- 28%, according to SimplyWise -- to cut back on their retirement savings.

These trends all point to the need for additional income in retirement. While some might turn to budget-cutting or finding a part-time job, current and future retirees with investment portfolios may be overlooking the potential of company stocks that pay dividends. A good dividend stock can put some real money in your pocket on a quarterly (or occasionally monthly) basis. Here are two of the best you might want to investigate further.

A mature couple looking at a laptop screen with their financial advisor

Image source: Getty Images.

1. Principal Financial Group has delivered consistent dividends

Principal Financial Group ( PFG -1.20% ) is a diversified financial services firm that offers insurance, investment management, and retirement plan administration for businesses. Launched in 1879 as an insurance company, it has a long history of providing solid, consistent dividends.

It currently pays out a quarterly dividend of $0.56 per share, which comes out to $2.24 per share per year. If you bought 250 shares of this stock, you would have $140 per quarter and $560 per year in income. That is in addition to the capital appreciation from the stock price's return. As a testament to its consistency, Principal Financial has raised its dividend annually for the past 13 straight years.

To evaluate a dividend stock, you should look at a few different measures. One is the yield, which is the percentage of the stock's current price pays out annually as a dividend. Principal Financial pays a yield of 4.4%, which is considered excellent. For comparison, the average dividend yield among stocks in the S&P 500 is about 2.5%. Another measurement gauge for the health of a dividend is the payout ratio, which is the percentage of net earnings that goes to pay dividends. Principal Financial has a payout ratio of 35%, which is in a very comfortable range. When payout ratios are too high, say over 70%, it can indicate that too much of a company's net earnings are being diverted to sustaining its dividend and not enough is being used to maintain the company's future growth.

A sustainable dividend is key. As an income investor, you want to know that the income will be there for you both now and when you really need it in retirement, whether that's a year from now or 10 or more years out.

Principal Financial's performance during the pandemic should give investors confidence in its ability to sustain its dividend if its third-quarter earnings results are any guide. While its life insurance business took a hit due to higher claims, its retirement plan business and investment management arms both had strong showings in the quarter ended Sept. 30. The retirement business saw revenue climb 13% year over year on the strength of its new digital 401(k) plan solution, Simply Retirement. Its investment business saw revenue increase 4% year over year due to the strong market for equities. It also has over $4 billion in cash, liquidity, and revolving credit. Principal Financial is a good value, trading below book value, which makes it a buy for its dividend and its capital appreciation potential.

2. Cincinnati Financial is a Dividend Aristocrat

Cincinnati Financial ( CINF -0.92% ) is regional insurance company, but it has a national reputation among investors as a great dividend stock. It has earned the designation as a Dividend Aristocrat because it is currently one of a select list of 66 companies that have increased their dividend payout each year for 25 or more straight years. Cincinnati Financial has raised its dividend 37 straight years. The company currently pays out a quarterly dividend of $0.60 per share ($2.40 per year). So, 250 shares of Cincinnati Financial's stock would generate $600 per year in income. It generated an above-average yield of 3.1% and has a payout ratio of about 57%, which is still in a safe range for sustainability.

Recent elevated catastrophic loss claims for customers of this property casualty insurer have temporarily boosted its combined ratio from 94% a year ago to 103% in the third quarter, but such a high level of claims is unusual (it's triple the 10-year average). Still, despite this, the company managed to increase its net income due to investment income gains and has boosted its cash position. Cincinnati Financial has had eight straight years of underwriting profit and has proven over the years its ability to weather the short-term volatility often found in the insurance business. Its Dividend Aristocrat status should speak to its consistency of operations and long-term dividend sustainability.

Supplemental income is more important than ever

These are two companies that have a proven track record of strong earnings and better-than-average dividends. Stocks prices for both are good values right now because of a broader market correction going on in the financial sector. Principal Financial and Cincinnati Financial would not be bad choices for income investors looking for viable options to supplement their retirement income.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Principal Financial Group, Inc. Stock Quote
Principal Financial Group, Inc.
$67.76 (-1.20%) $0.82
Cincinnati Financial Corporation Stock Quote
Cincinnati Financial Corporation
$112.85 (-0.92%) $-1.05

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