Though there are a lot of ways to make money in the stock market, few have proved more successful than investing in dividend stocks. A study from J.P. Morgan Asset Management, a subsidiary of JPMorgan Chase, showed that companies initiating and growing their payouts between 1972 and 2012 averaged an annual return of 9.5%. By comparison, non-dividend-paying stocks delivered a meager annualized return of 1.6% over the same 40-year time frame.
Dividend stocks are an especially smart investment idea for retirees. With core inflation hitting a nearly three-decade high recently, it's important for seniors to continue building their nest egg to offset rising prices. At the same time, retirees also want to ensure that their initial investment is well protected.
The good news is there are plenty of lower-risk, high-reward income stocks for retirees to choose from. Below are five of the safest dividend stocks retirees can buy right now.
NextEra Energy: 1.8% yield
Usually, electric utilities have yields of 3% or higher. The reason NextEra's is so low has to do with the company's stock outperforming its peers. Since yield is a function of payout relative to share price, a rising share price will reduce yield. Over the trailing 10 years, NextEra's shares are up 529%, and that's not including the dividend.
What really separates NextEra from its competition is its beefy investments in renewable energy. No U.S. utility is generating more capacity from wind and solar than NextEra. While these investments in green energy aren't cheap, they're helping to reduce the company's electric generation costs and lifting its earnings growth potential to the high single digits. Traditionally, electric utilities grow at a low single-digit rate.
Yet the company also benefits from the highly predictable cash flow associated with its regulated utilities (i.e., those not powered by renewable energy). Since electricity and natural gas demand don't fluctuate much from year to year, NextEra is a solid bet to deliver steady long-term returns.
Verizon Communications: 4.7% yield
If extremely low volatility and an inflation-crushing yield are more what you're after, telecom giant Verizon (NYSE:VZ) could be the perfect stock for retirees.
It's been a decade since wireless download speeds have been meaningfully improved for businesses and consumers. The ongoing rollout of 5G infrastructure is expected to lead to a multiyear technology upgrade cycle and a significant uptick in data consumption. Since Verizon leans on transparent and predictable cash flow from its wireless customers, and data is the key driver of its wireless margins, 5G is set to be a steady source of organic growth.
Additionally, Verizon has spent aggressively to acquire 5G mid-band spectrum. The purpose of acquiring this bandwidth is to bolster its in-home 5G broadband services. By the end of 2023, Verizon is aiming to have its 5G broadband in as many as 30 million U.S. households.
Verizon may be a slow-growing, boring business, but that's often a recipe for a market-topping dividend with minimal volatility.
IBM: 4.8% yield
Tech stalwart IBM (NYSE:IBM) is another extremely safe dividend stock that should be able to deliver modest long-term returns for retirees. IBM's yield is nearing 5%, and the company's quarterly payout has more than doubled over the past decade.
A quick look at IBM's share price performance since 2013 would leave most investors underwhelmed. That's because the company waited too long to shift its focus to cloud services. But thanks to a number of acquisitions and internal innovation, IBM's newfound focus on hybrid-cloud services has the needle pointing higher for Big Blue once again. The hybrid cloud, which combines public and private clouds and allows for the seamless sharing of data between the two, should be especially popular given that so many people are working remotely.
It's also worth pointing out that IBM has done a good job of cutting costs in its legacy software segments. Even though its legacy solutions are likely to see sales slip in the years to come, the margins in these segments remain robust. The bountiful cash flow being generated from IBM's legacy operations are fueling share buybacks, its juicy dividend, and bolt-on acquisitions.
AGNC Investment Corp.: 9% yield
Retirees hungry for an ultra-high-yield dividend stock with below-average risk should consider buying mortgage real estate investment trust AGNC Investment Corp. (NASDAQ:AGNC) right now. AGNC is sporting a 9% yield, pays out a monthly dividend, and has averaged a double-digit yield in 11 of the past 12 years.
Mortgage REITs like AGNC borrow money at lower short-term lending rates and use their capital to buy higher-yielding long-term assets, such as mortgage-backed securities. The goal is to maximize net interest margin, which is the difference between the yield received from MBSs and the average borrowing rate. The good news for AGNC and the entire mortgage REIT industry is that net interest margin tends to expand during the early stages of an economic recovery.
What's more, AGNC almost exclusively invests in agency securities. These are assets backed by the federal government in the event of a default. As you might imagine, having this added protection does lower the yield potential for agency securities. However, it also allows AGNC to use leverage to its advantage in order to beef up its profit potential. It's one of the safest ultra-high-yield stocks investors can buy.
Johnson & Johnson: 2.5% yield
Finally, healthcare conglomerate Johnson & Johnson (NYSE:JNJ) is a smart choice for retirees. Although its 2.5% yield is dwarfed by a few other names on this list, J&J has increased its base annual dividend for 59 consecutive years, and is one of only two publicly traded companies to have earned the highly coveted AAA credit rating from Standard & Poor's.
One reason Johnson & Johnson is such a great investment has to do with the defensive nature of healthcare stocks. Since we don't get to choose when we get sick or what ailment(s) we develop, demand for drugs, medical devices, and healthcare products tends to be consistent no matter how well or poorly the U.S. and global economies are performing. With the exception of the very brief coronavirus crash in March 2020, J&J's share price hasn't fallen more than 20% below its high in over a decade.
Johnson & Johnson's three core operating segments also bring something important to the table. For instance, even though healthcare products are the slowest-growing segment, they provide predictable cash flow and strong pricing power. There's also the medical devices segment, which is slow-growing for the time being, but perfectly set up to take advantage of an aging U.S. and global population. Lastly, pharmaceuticals generate most of J&J's growth and margins. However, given the finite period of exclusivity for brand-name drugs, the company's device and healthcare products divisions are crucial to its balanced growth.