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3 Dividend Stocks That Are Perfect for Retirement

By James Brumley - Feb 17, 2021 at 9:15AM

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Investors in their golden years should seek a balance of reliability, yield, and payout growth.

While they're often grouped together, not all dividend stocks are the same. Some that are sporting the highest yields only do so because their payouts aren't dependable. Others offer strangely low yields, but those payouts may rise dramatically each and every year. Still, others boast average yields and average payout growth but have paid and increased their annual dividends for decades.

Investors should look at every facet of a dividend-paying stock to get a better sense for which type they might own or consider purchasing. This is especially true for retirees, many of whom rely on dividend income to pay their bills.

Here's a rundown of three dividend-paying stocks that investors in or nearing retirement should consider adding to their portfolio.

Retired couple reviewing their portfolio while sitting at a table.

Image source: Getty Images.

1. Merck

Dividend yield: 3.5%  Dividend CAGR (5-year): 7.2%

Between potential pitfalls like price regulation and "patent cliffs," it has traditionally been tough to trust pharmaceutical stocks as income engines. But some drug companies have gotten very good at navigating around these headaches. Among the most learned is Merck (MRK 0.30%).

Merck is, of course, the maker of blockbuster drugs like cancer treatment Keytruda, HPV vaccine Gardasil, and Januvia, which helps type 2 diabetes patients keep their blood sugar levels in check. Then there's the dozen or so other drugs you've probably not heard of that still contribute to Merck's top and bottom lines.

Here's the thing about many of the company's best-selling drugs -- it didn't develop them from the ground up. It acquired them after they'd shown promise. Keytruda was being developed by Schering-Plough when Merck acquired it back in 2009. Some of the vaccine technology behind Gardasil is licensed to Merck by the NIH National Cancer Institute. Clearly, the drug business isn't just about internal R&D. It's largely about constantly updating a portfolio and pipeline of drugs in anticipation of looming changes for the pharmaceutical market. Merck's got plenty of experience in this regard. That's how it's been able to fund 10 consecutive years of dividend increases.

The current kicker: The company plans to make more than $20 billion worth of capital investments in new opportunities by the end of 2024.

2. Edison International

Dividend yield: 4.5%  Dividend CAGR (5-year): 8.8%

They may be boring to the point of being mind-numbing, but utility stocks make good sense for income-seeking investors. While consumers may postpone a vacation or skip a trip to the mall when times are tough, they generally do whatever it takes to keep the lights on. Their reliable monthly payments translate into equally reliable quarterly dividends for shareholders of utility names. The pick of the litter right now is Edison International (EIX 0.91%). The California-based company provides power to 15 million customers of subsidiary Southern California Edison, although Edison International also operates a utility company consultancy known as Edison Energy, rounding out its revenue stream.

Yes, it's been caught up California's recent wildfire woes, agreeing in January to a $2.2 billion settlement over its role in a 2018 fire. The company is abating its liability in this regard though, presenting a credible wildfire mitigation plan update earlier this month. This might start to curb the West Coast's power-related fire problems. In the meantime, Edison International is adapting to changes in how electricity is produced. In December, it announced the addition of another 590 megawatts worth of power storage at its California energy storage facilities, advancing its Pathway 2045 project that calls for the company's complete carbon neutrality within the next 24 years. Such standards are not yet codified into sweeping regulations, but that's the direction things are headed. Edison is being proactive about the future, which is always a good thing.

Best of all, newcomers are plugging into a nice yield of 4.5% that grew nearly 4% year over year when the company upped its payout for the 17th year in a row a couple of months back.

3. Clorox

Dividend yield: 2.4%   Dividend CAGR (5-year): 7.6%

Its yield of 2.4% isn't thrilling, but a closer look makes Clorox (CLX 0.93%) a surprisingly compelling dividend payer. Its payout has been growing at an annualized clip of 7.6%, and perhaps more important, its dividend has grown every year for the past 43 years. That qualifies it as a Dividend Aristocrat and, being just seven years away from being crowned a Dividend King (stocks that have upped their dividends for 50 or more consecutive years), you can bet the company is going to do whatever it can feasibly do to earn that title.

That's not even the only reason an income investor might be interested in this particular company. While the dividend is clearly a biggie, the company's current growth-driving initiative -- called IGNITE -- calls for annual sales growth of between 2% and 4% to improve margins and increase free cash flow as a percentage of revenue by 11% to 13%.

That's a lofty goal for a company of this size and age, particularly with a relatively new CEO at the helm (Linda Rendle only took over in September of last year). But in some regards, she's the perfect person to take charge of this particular product portfolio at this time. At 42 years old, she's already targeting Clorox's digital-savvy customer of the future as the company ups its digitally-driven sales focus. And Clorox's diversified suite of consumer products including Glad trash bags, Kingsford charcoal, and Liquid-Plumr. These are brands that can be leveraged to drive sales of other Clorox-made products -- especially now that the company is taking the power of digital consumer data more seriously.

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Stocks Mentioned

The Clorox Company Stock Quote
The Clorox Company
$139.59 (0.93%) $1.29
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$93.83 (0.30%) $0.28
Edison International Stock Quote
Edison International
$66.45 (0.91%) $0.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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