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3 Dividend Stocks That Are Perfect for Retirement

By Reuben Gregg Brewer - Updated Mar 25, 2021 at 10:34AM

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No stock is actually perfect, but if you are looking for retirement income, this trio of dividend payers has a lot to offer.

In retirement, you have to balance your costs with the income you generate, but generally without the benefit of a full salary. This is why adding dividend-paying stocks to your portfolio can be the perfect investment choice if you're entering or enjoying your retirement years. If you are looking to boost your retirement income, dividend payers Realty Income (O 1.25%), Kellogg (K -0.38%), and Dominion Energy (D 0.40%) are three stocks that you should be looking at today.

1. Old faithful 

Realty Income is a net lease real estate investment trust (REIT) with a focus on freestanding, single-tenant retail properties (about 85% of rents). Net lease REITs own properties, but their lessees are responsible for most of the operating costs of the assets they occupy. It's generally considered a low-risk approach in the REIT sector. And Realty Income is an industry bellwether in the space, with a massive 6,500-property portfolio.   

A woman making it rain 100 dollar bills.

Image source: Getty Images.

The company pays dividends monthly and has increased the payment every year for more than 25 consecutive years, making it a Dividend Aristocrat. It has an investment-grade balance sheet and gets roughly half of its rents from investment-grade tenants. Add in a 4.5% yield, which is well above the 1.5% or so you'd get from an S&P 500 Index fund, and there's a lot to like here today. The dividend has historically increased at a low-to-mid-single-digit pace, more than keeping up with inflation. All in all, if you are looking for a reliable dividend payer, Realty Income will fit nicely in your portfolio.  

That said, the yield is roughly in the middle of Realty Income's historical dividend range over the past decade. So you'll be paying full price for the stock -- which isn't a bad choice, but value investors will probably be turned off.  

2. Out of favor

This is where Kellogg comes in, as its 3.7% yield is toward the high end of its historical yield range. That suggests, using dividend yield as a proxy for valuation, that the food maker's stock is relatively cheap right now. And while it hasn't increased its dividend every single year for decades like Realty Income, it has a long history of the dividend moving steadily higher over time. It just announced another increase along with its full-year 2020 earnings.  

The thing with Kellogg is that it has just completed a major business overhaul in which it sold off slow-growth businesses and bulked up in areas with more opportunity. Today its portfolio of food products is broken down between snacks (about 55% of revenues), cereal (33%), and frozen foods (the remainder). Foreign sales make up about 30% of the company's segment operating profits, with a notable focus on emerging markets. The problem is that Kellogg is projecting organic sales will fall 1% in 2021.   

That sounds bad, but there's some nuance here. The coronavirus pandemic led to a huge spike in organic sales in 2020 that isn't going to be sustainable as life gets back to normal. When management takes that into account, it believes that the two-year annualized growth rate is more like 2.5%, which is pretty solid for a food company. The market doesn't appear to appreciate the improvement here, and that's an opportunity for investors seeking out relatively cheap stocks with solid dividends.   

3. A dividend cutter?

The last name on the list, Dominion Energy, is a bit more controversial from a dividend standpoint. The utility actually cut its dividend in 2020, taking the quarterly payout down by about 33%. That, however, is roughly the size of the pipeline business the company sold during the year, as it looked to refocus its business on regulated utility assets. At this point it is pretty much a boring utility serving 7 million customers across 16 states.  

O Dividend Yield Chart

O Dividend Yield data by YCharts

And while that dividend cut hurt, it's water under the bridge at this point. The future is what's important, and that's expected to include a long period of generous dividend growth backed by investments in the company's government-regulated businesses. But it helps to put some numbers on all of this. Dominion's five-year spending plan is a whopping $32 billion, which will allow it to support calls for higher rates over time. It believes this will lead to earnings growth of around 6.5% a year through to 2025. That, in turn, will support dividend growth of roughly 6% a year with a solid payout ratio of around 65%.    

Before the dividend cut and asset sale, Dominion's payout ratio was among the highest in the industry, and it was looking at meager earnings growth rates. So, for investors seeking out a dividend growth stock to add to their retirement portfolios, Dominion's repositioning transaction looks like it has opened up a good opportunity. The yield is a generous 3.4% today.

One of the above

"Perfect" is a tough call on Wall Street, since every company comes with some warts. However, if you are looking for a reliable dividend payer, Realty Income is a great place to start even if you are paying full price. Kellogg is a bit out of favor today, which should entice value investors. And Dominion is getting ready to ramp up its dividend growth engine, which is something that will interest dividend growth investors. All in all, it's likely that one or more of these stocks could be perfect for your retirement portfolio if you take the time for some deep dives.

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Stocks Mentioned

Realty Income Corporation Stock Quote
Realty Income Corporation
$67.99 (1.25%) $0.84
Kellogg Company Stock Quote
Kellogg Company
$67.74 (-0.38%) $0.26
Dominion Resources, Inc. Stock Quote
Dominion Resources, Inc.
$82.54 (0.40%) $0.33

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

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