Income is often the name of the game for retirees, which makes dividend-paying stocks a lot more attractive. But there's a huge risk here if you focus too much on high yields and not enough on dividend growth. There's a middle-of-the-road approach, and these two dividend stocks can help you traverse it, and your retirement years, in style.
1. Realty Income: Slow and steady
Real estate investment trust (REIT) Realty Income (O 0.52%) is the first choice here. With a dividend yield of roughly 4.2%, it is offering more than twice the income you'd get from an S&P 500 index fund today. Moreover, if you are a fan of the 4% rule, this stock's distribution would allow you to avoid touching your principal. But there's much more to like about the dividend.
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Realty Income has increased its dividend every year for over 25 consecutive years, making it a Dividend Aristocrat. The average annual increase over the past decade has been roughly 5% a year, enough to offset the historical impact of inflation and even increase the dividend's buying power a little bit. And the dividend is paid monthly, which helps to balance spending needs with income flow.
That's all great on the dividend front, but the really interesting thing is that Realty Income is the leading name in the net lease REIT niche, with a portfolio of nearly 6,600 properties. Net lease REITs own properties, but their tenants are responsible for most of the operating costs of the assets they occupy. It's generally considered a low-risk investment tactic in the real estate space. With size come benefits, including the ability to make acquisitions that smaller peers couldn't muster. And that's exactly what's on tap here, as Realty Income prepares to consummate a deal to acquire VEREIT, a move that will increase its portfolio to more than 10,000 properties.
Realty Income expects the acquisition to be 10% accretive to adjusted funds from operations (FFO), a REIT metric similar to earnings for an industrial company. There will be ongoing benefits as well, as costs get cut and VEREIT debt gets rolled over to Realty Income's lower rates. And an even larger Realty Income will be able to further distance itself from the pack when it comes to inking big deals. In other words, a good REIT looks as if it is getting even better, and that should be music to the ears of dividend investors in search of a reliable income stock.
2. Hormel: Going for (dividend) growth
Realty Income is a great core holding, but you can't forget that inflation is a big issue, and it fluctuates over time. This is why you also want to include some lower-yielding names that have a strong history of rapid dividend growth. Hormel (HRL 1.31%) is a great example. Although its dividend yield is only around 2% today (still well above the paltry 1.3% you'd get from an S&P 500 index fund), it has increased its dividend by roughly 15% a year over the past decade. That's five times the roughly 3% historical growth rate of inflation, materially increasing the buying power of the distribution over time.
The big thing here is that Hormel is a brand manager, with food products that span the grocery store, including iconic names like SPAM, SKIPPY, Jennie-O, and Dinty Moore. It has been using targeted acquisitions to grow its increasingly global business (most recently buying Planters). However, it has always focused on maintaining a rock-solid balance sheet, making sure to pay down debt before stepping back up to the acquisition plate. Financial strength has been a key story in the company's ability to increase its dividend annually for over five decades, making it a Dividend King.
HRL Dividend Per Share (Quarterly) data by YCharts
The mixture of rapid dividend growth and financial strength make this a great addition for retired investors who need to balance higher-yielding but slower-dividend-growth holdings (such as utilities). Yes, the 2% yield isn't so impressive today, but a decade of increases later and the yield on purchase price will be much more attractive. The purpose here is to round out a diversified portfolio so the overall result is a stronger and more resilient flow of dividend income.
Both sides matter
If you are retired, you are probably focusing on dividend income, which is great. A name like Realty Income is kind of in the sweet spot, offering a fairly generous yield and modest dividend growth. But don't forget to add dividend-growth-focused names like Hormel to the mix as well, since they will help you avoid the ravages of inflation that will eat away at slow-growing dividends from higher-yielding investments. You need income and income growth if you want to sleep well at night once you start to live off of your nest egg.
