When you shift into retirement, you go from building a nest egg to living off of it. It's a huge change in mentality, but one that can be helped along by investing in dividend-paying stocks. That way, you can reduce the need to touch your principle by living off of the dividends you collect.
If that sounds like a good plan, you'll want to take a close look at Consolidated Edison (ED -1.25%), Federal Realty Investment Trust (FRT -0.37%), and Hormel Foods (HRL 0.14%). Here's why.
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1. Con Ed: Slow, boring, and positioned for the times
Con Ed, as it is known locally, is a regional utility serving New York City and its surrounding areas. It sells electricity, natural gas, and steam. It is regulated, so it has to get rate hikes approved by the government. That's a mixed blessing, since it means that rate growth is pretty much assured, as long as the utility keeps investing in its business, but also capped at a modest level.
So slow and steady is the big story here. But, right now, Con Ed has a generous 3.5% dividend yield. That's notably higher than the 2.8% yield of the average utility, using Vanguard Utilities Index ETF as a proxy.
What's more interesting, however, is a note the company sent out to customers in the face of rising electricity and natural gas rates. While a lot people are blaming the utility for the increase in costs, the company explains: "Con Edison buys energy on the wholesale market and provides it to customers at the same price we paid without a profit. We don't generate electricity." The same is basically true of natural gas.
What Con Ed gets paid for is the use of its wires and pipes. And that's a highly reliable business that should be able to support the dividend for years to come, as it has for the past 47 years, all of which included a dividend increase. The company is a Dividend Aristocrat and well on its way to becoming a Dividend King.
The delivery-only model, meanwhile, will become increasingly important as solar and wind power replace carbon power sources that underpin much of the region's current energy production.
2. Federal Realty: The REIT king
The next name up is real estate investment trust (REIT) Federal Realty. The company is a Dividend King with over 50 years of annual dividend increases under its belt. The yield isn't huge, at 3.6%, but the retail-focused landlord has proven to be incredibly reliable.
In fact, it has the longest dividend growth streak of any REIT. The average REIT, meanwhile, using Vanguard Real Estate Index ETF as a proxy, has a yield of 2.2%, which makes Federal Realty's yield look relatively attractive.
What's most interesting about Federal Realty, however, is that it has achieved this success with a highly focused business model. While some of its peers work on expanding their portfolios, Federal Realty is content owning around 100 or so exceptionally well-located properties. It's "value over volume" strategy focuses on adding value over time through redevelopment.
If the dividend streak is any indication, it has proven very successful in adding value to its properties. But this is an active portfolio, so the REIT is always willing to buy and sell properties to improve its portfolio. For example, it used the pandemic downturn to buy its way into Phoenix, a new market to the portfolio. As long as Federal Realty keeps using this playbook, there's no reason to think that it won't be able to increase its dividend for years to come.
3. Hormel: Food on sale
The last name on the list is Hormel, which is probably the most attractively priced despite its modest 2% dividend yield. The truth is, that yield is toward the high end of the company's historical yield range. And it is backed by more than 50 years of annual dividend increases.
The backbone of Hormel's business is protein. But it's really a branded food company, owning iconic names like SPAM, its namesake Hormel, and Planters. It has leading positions throughout the grocery store and a material food service business, where it sells precooked meat products.
The problem today is inflation, which is likely to be a margin headwind over the near term. But that's a short-term issue and one that is historically common for food makers like Hormel. The company will eventually pass rising costs along to consumers via price hikes.
However, if you are willing to go against the crowd just a little, you can buy it at a relatively cheap price today. And, more to the point, that modest yield is made up for by the historically robust dividend growth rates Hormel has achieved.
To put a number on that, the annual dividend payment here has increased more than 220% over the past decade. So while the dividend yield may be modest today, if you buy and hold, your yield on purchase should end up being very rewarding.
Time for some deep dives
If you want reliable dividends, Con Ed, Federal Realty, and Hormel all have impressive dividend-paying track records. You may have to give up a little yield to get in the door at each one, but for conservative investors more concerned with ensuring they get paid than creating the highest possible income stream, this trio is a great starting place.
That said, the dividend growth piece of the equation, over time, can help to make up for the more modest yields on offer here today. So even if you have other high-yield names on your wish list, you might still want to add these long-term dividend growers.
